A bank guarantee is a type of guarantee from a lending institution. The bank guarantee means a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.
Generally, the bank agrees to issue a bank guarantee with conditions. The bank in turn will request the account holder enters into some form of pledge agreement with them. Generally, the bank accepts liquid assets to issue a guarantee. The list includes cash at bank, stocks and shares and bonds.
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods.