Letter of Credit vs Bank Guarantee: Which Trade Finance Instrument to Choose
Updated 26 September 2026: removed fee ranges that no source supports, corrected the status of blockchain platforms and of electronic transferable records in India, and removed a link to an LC service FTA Marketplace does not offer. In international trade, trust is the scarcest commodity. When a buyer in Germany orders goods from a supplier in India, both parties face significant risks — the buyer risks paying for goods that may not arrive or meet specifications, while the seller risks shipping goods without receiving payment. Letters of Credit (LCs) and Bank Guarantees (BGs) are the two primary financial instruments that bridge this trust gap, but they serve different purposes and work in fundamentally different ways. This guide breaks down both instruments, compares them, and helps you choose the right one for your situation. What Is a Letter of Credit? A Letter of Credit (LC) is a written commitment by a bank (the issuing bank) to pay the seller (beneficiary) a specified amount, provided the seller presents documents that comply with the terms of the LC. It is governed by the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce. How an LC Works Buyer and seller agree on LC as the payment method in their sales contract Buyer applies to their bank (issuing bank) to open an LC in favor of the seller Issuing bank opens the LC and sends it to the seller's bank (advising bank) Seller ships the goods and prepares…
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