A contingent guarantee differs from a letter of credit (LC), which is more frequently used in international trade. A contingent guarantee is employed solely upon non-payment after a stipulated length by the buyer, whilst an LC is payable by the bank as quickly as the seller effects shipment and satisfies the conditions of the LC. LCs assist mitigate factors such as distance, legal requirements and counter-party reputation.

Because a letter of credit usually is a negotiable instrument, the issuing bank pays the beneficiary or any bank nominated via the beneficiary. If a letter of credit is transferrable, the beneficiary can also assign some other entity, such as a corporate parent or a third party, the right to draw.

Banks usually require a pledge of securities or cash as collateral for issuing a letter of credit. Banks additionally collect a price for service, normally a percentage of the dimension of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of deposit used in worldwide transactions.