| Feature | Letter of Credit (LC) | Bank Guarantee (BG) |
| Purpose | Ensuring the payment to the seller upon fulfilling contract terms & conditions. | Acts as a financial safety net if the buyer fails to fulfill the agreement. |
| Risk Coverage | Primarily protects the seller (exporter) from risk. | Primarily protects the buyer (importer) or beneficiary from risk. |
| Nature | It is a conditional payment instrument where a bank guarantees payment if conditions are fulfilled. | It is a secondary obligation that the bank pays only if the client defaults. |
| Common Usage | Used in international & global business to ensure sellers that they get paid. | Used in domestic and international transactions for performance and the financial guarantees. |
| Initiated By | Issued by the Buyer (importer) | Seller (contractor) or buyer (client) |
| Payment Timing | Payment is made when the terms & conditions in LC are fulfilled. | Payment is made only in case of delay of default. |
| Risk for Bank | It is a higher risk since the bank promises to pay upon the document compliance. | It is a lower risk as the bank pays only if the client defaults or delay. |
