A Beginner’s Guide to Letters of Credit and Bank Guarantees

Trust plays an important role in international as well as domestic business. Buyers want assurances that deliveries will take place on time, and sellers want assurances that they’ll get paid. That’s where Letters of Credit (LC) and Bank Guarantees (BG) come into play — two powerful tools that guarantee business transactions for all.

Have you ever wondered what exactly these terms mean or how they work? Don’t fret, this guide will guide you. By the end of it, you’ll know the basics — and learn how OTC Training Centre Sdn Bhd’s professional programme can help you apply this in the real world.

What Is a Letter of Credit (LC)?

A Letter of Credit is literally a bank guarantee. It’s a bank guarantee on behalf of a buyer to assure the seller that he or she will receive payment, provided only the seller hands over documents in accordance with the stipulated conditions.

It’s especially well-liked in foreign trade, where buyers and sellers often do not know each other. The LC bridges that chasm with a trustworthy go-between — the bank.

Key Parties Involved

1. Applicant (Buyer/Importer) – requests the LC from his/her bank
   
2. Beneficiary (Seller/Exporter) – paid once conditions are met
   
3. Issuing Bank – buyer’s bank that issues the LC
   
4. Advising/Confirming Bank – seller’s bank that confirms or adds confirmation

    

Common Types of LCs

How an LC Works

1. Buyer and seller agree to use an LC.
2. Buyer’s bank issues the LC and sends it to the seller’s bank.
3. Seller exports goods and submits required documents (invoice, bill of lading, etc.).
4. Bank checks the documents carefully.
5. If everything goes as planned, payment is made to the seller.

    

Risks & Challenges

While an LC does offer protection, it’s not risk-free:

• Minor document mistakes can hang up or bar payment.
• Cor Tortious or counterfeit documents are potential.
• Political or banking issues can cut off transactions.
• There are bank fees involved for both parties.

   

What Is a Bank Guarantee (BG)?

While an LC provides payment assurance, a Bank Guarantee provides performance assurance. It is a bank guarantee that in the event the applicant fails to meet their contractual obligations, the bank will settle the beneficiary in lieu thereof.

It is frequently used in construction work, service contracts, or tenders.

The Key Players

• Applicant – the firm or individual making the application for the guarantee

   

• Beneficiary – the party being safeguarded under the guarantee

   

• Issuing Bank – issuing bank of guarantee

Types of Bank Guarantees

How a BG Works

1. The applicant applies for a BG to the bank.
2. The bank takes into consideration financial standing and issues the guarantee.
3. If there’s a default by the applicant, the beneficiary is paid the guaranteed sum.

    

Risks & Challenges

• Applicants must provide collateral or have good credit standing.
  
• Claims must adhere to the guarantee terms verbatim.
  
• Grossly drafted terms can lead to disputes or delays.

   

LC vs BG: What’s the Difference?

In short, an LC guarantees payment, while a BG guarantees performance.

Why You Should Know LC & BG Matters — and How OTC Training Centre Helps

These documents can be technical-sounding, but knowing them can make a big impact on your business transactions. LCs and BGs are applied daily by numerous professionals — from finance directors to operations managers — without fully understanding their risks and advantages.

That’s why OTC Training Centre Sdn Bhd offers a comprehensive “Letter of Credit and Bank Guarantee” program designed to help professionals gain real-world expertise.

Through this course, participants will:

• Understand the structure and purpose of LCs and BGs
  
• Learn how to draft, analyze, and manage these instruments effectively
  
• Explore international rules and best practices (UCP 600, ISP98)
  
• Identify and mitigate risks in handling trade finance documents
  
• Participate in case studies and real-life simulations

   

📘 Program Details:
➡️ Letter of Credit and Bank Guarantee – OTC Training Centre

This program is ideal for:

• Trade Finance Officers
  
• Procurement & Logistics Staff
  
• Exporters & Importers
  
• Contract Managers
  
• Business Owners involved in international trade

   

By joining this OTC course, you’ll gain the practical skills needed to handle complex trade transactions confidently and minimize financial risks.

Quick Tips for Beginners

1. Start with the basics — Don’t rush. Learn the key terms first.
2. Learn from actual examples — Learning through examples is the simplest way to go.
3. Check every document carefully — One small typo can cause rejection.
4. Understand your bank’s role — Different banks have different procedures.
5. Get proper training — Hands-on learning, like OTC’s course, builds real confidence.

    

Conclusion

Letters of Credit and Bank Guarantees are more than just paperwork — they are essential financial tools that enable safe and reliable trade. By mastering them, you’ll gain stronger control over risk, compliance, and negotiation in every business deal.

If you’re ready to build your understanding and gain practical exposure, join OTC Training Centre Sdn Bhd’s Letter of Credit and Bank Guarantee training today.

🔗 Learn More and Register Here