Bank Guarantees (BG) are negotiable financial debt bank instruments made by a guarantor bank on behalf of the applicant to mitigate risk on behalf of the beneficiary party. It may be used to assist in trade finance, international trade, domestic trade, and various other types of contracts where the backdrop of a vetting third-party (the issuing bank) could be used.

When a bank issues a Letter of Guarantee to a beneficiary bank it looks at the credit worthiness of the applicant, not the transaction at large. Thus the ability to acquire bank instruments like a Bank Guarantee largely is based on the relationship it has with its client.

The BG is very similar to that of a LC in that it guarantees payment on behalf of its client to the beneficiary. However, a Bank Guarantee is usually used in the event there is default. If for instance a purchaser of goods issues a BG to the seller of goods and if after delivery payment were not made for some or the entire contracted amount, these bank instruments acts like a draft or check allowing the Beneficiary to cash it in.

Documentary Letters of Credit are bank instruments issued from an applicant’s bank on behalf of a beneficiary to aid in mitigating risk and creating a layer of protection against non-payment. Similar to a bank guarantee it aids the beneficiary to have confidence a rated financial institution will ensure payment for service rendered once all terms and conditions contractually are met. However, unlike a bank guarantee, the letter of credit, as in the case with a standby letter of credit, the instrument is required as the mechanism by which payment is made; whereas bank guarantees are usually only drafted against or called in the event of default.

Because Letters of Credit are negotiable debt instruments, meaning the bond or debt may be passed onto another party for collection, the value may also be monetized like the value of a top bank rated and issued bond. This gives the ability to use Letters of Credit not only for their primary use as methods of payment, but they can also be valued and pledged in terms of loans and debt.

Unlike traditional letter of credit bank instruments where the beneficiary obtains payment against papers demonstrating delivery, the Standby Letter of Credit (SBLC) may allow a beneficiary to obtain payment from a financial institution even when the applier for the credit has neglected to perform as per bond.

A key principle to remember with the Standby Letter of Credit is banks deal only in documents or goods and do not involve themselves in the commitments and contracts between the two parties directly. The concern of the issuing bank is the terms and conditions of the letter of credit itself. The decision to pay by an SBLC is based entirely on whether the documents submitted to the bank appears on their face to comply with the terms of LC bank instruments.