09-06-2025
A bank guarantee and a standby letter of credit (SBLC) are financial instruments used to provide assurance in commercial transactions, ensuring that a party's obligations will be met. Both instruments are essentially promises made by a bank to pay a third party if a certain condition or event occurs, but they are used in slightly different contexts and operate under different terms.
Bank Guarantee (BG)
A bank guarantee is a promise by a bank to pay a specified amount to a beneficiary (usually a seller or creditor) in case the party that requested the guarantee (the applicant) fails to fulfill their obligations. It is often used in construction, trade, and other commercial contracts.
Key Features:
Applicant: The party requesting the guarantee (typically a buyer or contractor).
Beneficiary: The party receiving the guarantee (typically the seller or client).
Obligation: The bank guarantees that if the applicant fails to meet their contractual obligations (such as payment, delivery, or completion of work), the bank will pay the beneficiary a specified sum.
Types of Guarantees:
Performance Guarantee: Ensures that a contract is performed as agreed.
Payment Guarantee: Ensures that payment will be made for goods or services provided.
Advance Payment Guarantee: Ensures the repayment of advance payments if the applicant does not fulfill the contract.
Bid Bond: Ensures that the applicant will honor their bid in a tender process.
When it's Used:
Often required in large contracts or international trade where one party wants to ensure that the other party will perform according to the terms of the contract.
It is often used in construction projects, leasing, or tendering.
How it Works:
A party (the applicant) requests a bank guarantee from their bank.
The bank issues the guarantee to the beneficiary.
If the applicant fails to fulfill the terms of the contract, the beneficiary can claim the guarantee amount from the bank.
Example: A contractor may request a performance bank guarantee from a bank to assure the client that the project will be completed according to the terms of the contract. If the contractor fails, the client can claim the amount of the guarantee from the bank.
Standby Letter of Credit (SLC)
A standby letter of credit (SLC) is a type of letter of credit issued by a bank, which guarantees payment to a beneficiary in case the applicant defaults on their obligations. While both a bank guarantee and an SLC provide assurance of payment, the key difference lies in the purpose and circumstances under which they are activated.
Key Features:
Applicant: The party requesting the SLC (typically a buyer or borrower).
Beneficiary: The party to whom the SLC is issued (typically the seller or lender).
Obligation: The bank promises to pay the beneficiary in case the applicant fails to meet their obligations. The SLC acts as a backup or "last resort" guarantee.
Reimbursement: Unlike a bank guarantee, which may not require repayment if a claim is made, an SLC usually requires the applicant to repay the bank if the guarantee is called.
Types of SLCs:
Performance SLC: Used to guarantee performance in contracts, much like a bank guarantee.
Payment SLC: Guarantees that the applicant will pay the beneficiary.
Trade SLC: Used in international trade, guaranteeing payment for goods or services.
When it's Used:
It is often used in international trade, where the buyer and seller are unfamiliar with each other and need a form of financial assurance.
It can also be used for loans, leases, and even for securing performance on a contract.
How it Works:
The applicant requests the SLC from their bank.
The bank issues the SLC to the beneficiary.
If the applicant fails to meet the contract terms, the beneficiary can draw on the SLC for payment.
The applicant must repay the bank for any sums drawn under the SLC.
Example: In international trade, a seller may require a standby letter of credit from a buyer's bank to ensure payment. If the buyer defaults on payment, the seller can draw on the SLC to recover the amount owed.
About Chandra Credit Limited
We are specialized financial service providers based in Noida that provide various financial services letter of credit, bank Guarantee,SBLC and Project funding. Feel Free to Contact us on info.chandracredit.com or call us on +91 84482 78716
