Bank Guarantee & Letter of Credit

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Few business entities might require Bank Guarantees as well as Letter of credit limits, apart from regular cash credit and overdraft limits. Infrastructure companies and other companies who are dealing with government organisations normally require these Bank Guarantee limits and Letter of Credit also.

A bank guarantee or 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 position . 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.

Banks will sanction these limits by taking some properties as security. Banks would also demand cash margins by way of fixed deposit to offer such facilities. Banks will charge commission for the period of availment of BG/LC limits.