This article provides a detailed comparison between Bank Guarantees (BGs) and Standby Letters of Credit (SBLCs), focusing on their key characteristics.

Definitions:

• Bank Guarantee (BG): A financial instrument issued by a bank on behalf of a client (often called the "guarantor"). It acts as a promise from the bank to pay a specific sum to a third party (the "beneficiary") if the client fails to fulfill its obligations under an underlying contract.
• Standby Letter of Credit (SBLC): A commitment issued by a bank on behalf of a client. It promises to pay the beneficiary upon presentation of specific documents that demonstrate the client's failure to fulfill its obligations under the underlying contract.

Purpose:

• BGs: Primarily used to secure obligations within a domestic context, such as:
  • Performance Guarantees: Ensuring the completion of a construction project.
  • Payment Guarantees: Securing payment for goods or services.
  • Bid Bonds: Guaranteeing that a bidder will enter into a contract if awarded.
• SBLCs: Primarily used in international trade transactions to:
  • Ensure payment: Safeguard the seller in case the buyer defaults.
  • Support creditworthiness: Enhance the buyer's credit standing with suppliers.
  • Provide financial guarantees: Back up various contractual obligations.

Functionality:

• BGs:
  • Secondary Obligation: The bank's liability is secondary to the client's primary obligation.
  • Payment is triggered by a demand from the beneficiary, often without the need for extensive documentation to prove the client's default.
• SBLCs:
  • Primary Obligation: The bank's liability is direct and independent of the underlying contract.
  • Payment is triggered upon presentation of specific documents by the beneficiary that demonstrate the client's failure to fulfill its obligations. This requires stricter adherence to documentary requirements.

Usage:

• BGs: Common in construction, leasing, and infrastructure projects within a country.
• SBLCs: Widely used in international trade transactions, such as:
  • Import/Export transactions
  • Sale of goods
  • Service contracts
  • Project finance

Governing Rules:

• BGs: Primarily governed by the ICC's Uniform Rules for Demand Guarantees (URDG).
• SBLCs: Primarily governed by the ICC's International Standby Practices (ISP) or the Uniform Customs and Practice for Documentary Credits (UCP).

Documentation:

• BGs: Generally require minimal documentation, often focusing on the terms of the guarantee itself, such as the amount, validity period, and conditions for payment.
• SBLCs: Require more extensive documentation, including:
• Detailed descriptions of the underlying contract.
• Precise specifications of the documents required for payment (e.g., invoices, bills of lading, certificates of performance).