What is the difference between a Bank Guarantee and a Letter of Credit?

A letter of credit is an independent undertaking from the issuer, promising that subject to fulfillment of specific terms and conditions the party in whose favor the undertaking has been issued will get paid even if the party on whose behalf the issuer has given the undertaking refuses to pay. Whereas, the bank guarantee represents a secondary obligation covering default only, thus providing security against non-performance as opposed to performance.

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