Introduction
Standby Letters of Credit (SBLC) and Bank Guarantees (BG) are two commonly used financial instruments in international trade transactions. Although they serve similar purposes, there are differences between SBLC and BG that make them distinct from each other. This article provides an overview of the differences between SBLC and BG, including their definitions, types, and uses.
Definitions of SBLC and BG
An SBLC is a financial instrument issued by a bank that serves as a guarantee of payment to the beneficiary in the event that the applicant fails to fulfill their obligations under the underlying contract. A BG is a written undertaking by a bank to make payment to the beneficiary in the event that the applicant fails to fulfill their obligations under the underlying contract.
Types of SBLC and BG
There are different types of SBLC and BG, including:
Performance SBLC and BG: These are used to guarantee payment for the performance of the applicant's obligations under the underlying contract.
Financial SBLC and BG: These are used to guarantee payment for the applicant's financial obligations under the underlying contract, such as the payment of rent, taxes, or interest.
Advance Payment SBLC and BG: These are used to guarantee payment of an advance payment made by the beneficiary to the applicant for the fulfillment of the underlying contract.
Uses of SBLC and BG
SBLC and BG are used for similar purposes, including:
Assuring Payment: Both instruments provide assurance to the beneficiary that they will receive payment in the event that the applicant fails to fulfill their obligations under the underlying contract.
Facilitating Trade: SBLC and BG facilitate international trade transactions by providing security and reducing the risk of non-payment.
Differences between SBLC and BG
Although SBLC and BG serve similar purposes, there are differences between them that make them distinct from each other, including:
Nature of Guarantee: An SBLC is a guarantee of payment, while a BG is a guarantee of performance. This means that an SBLC is used to ensure that the beneficiary receives payment in the event that the applicant fails to make payment, while a BG is used to ensure that the applicant performs their obligations under the underlying contract.
Parties Involved: In an SBLC, there are usually three parties involved: the applicant, the issuing bank, and the beneficiary. In a BG, there are usually two parties involved: the applicant and the beneficiary.
Payment: In an SBLC, payment is made only when the applicant fails to fulfill their obligations under the underlying contract. In a BG, payment may be made even if the applicant has not yet failed to fulfill their obligations under the underlying contract.
Conclusion
In conclusion, SBLC and BG are two distinct financial instruments that serve similar purposes in international trade transactions. Understanding the differences between them, including their definitions, types, and uses, is crucial in choosing the appropriate instrument for a particular transaction. While both instruments provide security and reduce the risk of non-payment, they differ in the nature of the guarantee, parties involved, and payment.
References
International Chamber of Commerce. (2018). Uniform Rules for Demand Guarantees (URDG 758). International Chamber of Commerce.
Kronman, A. M. (2017). International Standby Practices: ISP98. International Chamber of Commerce.
Shapiro, G. (2016). The Law and Practice of International Banking. Oxford University Press.