Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A bank guarantee and a letter of credit are both promises from a financial institution that a borrower will be able to repay a debt to another party, no matter what the debtor's financial circumstances.
While different, both bank guarantees and letters of credit assure the third party that if the borrowing party can't repay what it owes, the financial institution will step in on behalf of the borrower.
By providing financial backing for the borrowing party often at the request of the other one , these promises serve to reduce risk factors, encouraging the transaction to proceed. But they work in slightly different ways and in different situations. Letters of credit are especially important in international trade due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting in person.
While letters of credit are primarily used in global transactions, bank guarantees are often used in real estate contracts and infrastructure projects. Bank guarantees represent a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary.
The bank only pays that amount if the opposing party does not fulfill the obligations outlined by the contract. The guarantee can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
Bank guarantees protect both parties in a contractual agreement from credit risk. For instance, a construction company and its cement supplier may enter into a contract to build a mall. Both parties may have to issue bank guarantees to prove their financial bona fides and capability. In a case where the supplier fails to deliver cement within a specified time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee.
Bank guarantees are just like any other kind of financial instrument—they can take on a variety of different forms. For instance, direct guarantees are issued by banks in both domestic and foreign business. Indirect guarantees are commonly issued when the subject of the guarantee is a government agency or another public entity.
The most common kinds of guarantees include:. Bank guarantees are commonly used by contractors while letters of credit are issued for importing and exporting companies.
Enter email address This field is required Sign Up. Final sign-off for cheques is all but guaranteed. Facebook Twitter Email. The Government has been attempting to wean people off cheques by hiking the stamp duty on them. The duty on each cheque has jumped from 15c to 50c in recent Budgets. Daily Digest Newsletter Get ahead of the day with the morning headlines at 7.
Its members include all the main banks. Yes — until cheques are abolished, expected to be in The Payments Council says that the change in June does not mean the end of cheques: "You will still be able to write them, and businesses will still be able to choose to accept them — without the guarantee. Many people don't understand how the scheme works — they write their card details on the back of a cheque before posting it, even though the guarantee only applies if the customer physically hands over the cheque.
As happens now, any business can accept a cheque without a guarantee. The industry body says its message to businesses is "you can continue to accept a cheque with confidence". It says that if you receive a cheque, the funds will be in your account by the end of the sixth working day after you paid it in, "so this is the point when it's safe to release goods or services".
Banks and building societies are contacting their customers before the end of June to inform them the scheme is ending, and to remind them they can continue to write and accept cheques. Some banks will send people new cards without the logo before 30 June; others won't. Neither approach affects the timescale for the closure on 30 June.
Not really. In December the industry set a target date of October for the end of cheques. This will be reviewed in , "and will only go ahead if cheque alternatives are in place, are acceptable and are actually being used".
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