A bank guarantee and a letter of credit are similar in many ways, but the differences are worth noting. Letters of credit ensure that a transaction proceeds as planned while bank guarantees reduce the loss if the transaction doesn't go as planned.

A letter of credit is an obligation. When you meet certain criteria you will obtain payment, if you do not meet the criteria exactly you do not get paid. Once these exact terms are met and confirmed, the bank will transfer the funds to your bank. This ensures the payment will be made as long as the services are performed.

A bank guarantee is a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party fulfills the stipulated obligations under the contract. This can be used to ensure a buyer or seller from loss or damage due to nonperformance by the other party in a contract but does not offer as much protection as the letter of credit.

For example, a letter of credit could be used in the delivery of goods or the completion of a service. The seller may request that the buyer obtain a letter of credit before the transaction occurs. The buyer purchases the letter of credit from a bank and forwards it to the seller's bank. This letter substitutes the bank's credit for that of its client, ensuring correct and timely payment. A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can't pay the seller. The bank guarantee is to pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction.

Other methods like credit and PayPal protect people from loss because of bad services. Because there are more risks when people buy online, these credit options will offer to stop the transaction altogether if the item is not what was ordered or to reverse the transaction. This protects the customer’s money. Many times this “shopping online” is international trade without consumers realizing what all the different steps are. 

Guarantees and or Letters of Credit are used by suppliers, or vendors, at a higher level and volume because the buyers and sellers don't have established business relationships. The instruments are designed to reduce the risk taken by each party.