In business, there are times when customers need to request from the bank to assure that they will fulfill commitments made to suppliers. They can make this request through a letter of guarantee. You can use this letter in equipment leasing contracts and when dealing with large companies with the assets required by another party interested in a specific type of contract.
What is a letter of guarantee?
A letter of guarantee is a written assurance that a person, entity, or organization will fulfill the obligations of a contract they have entered into with another person, entity, or organization. A bank can use this letter of guarantee to assure a customer that when buying the goods from the supplier, you will be able to deliver them.
A letter of guarantee is a document that gives a “guarantee” on its face. It is generally used in tenders and projects. However, it is widely used in terms of customer limits in the purchase and sale of goods. The person who will buy goods or services gives a certain amount of letter of guarantee to the seller and opens a limit for himself before the company. Thus, he can easily make his purchases and sales in line with this limit.
The letter of guarantee consists of a text. In the text, it is stated that the work done is guaranteed as much as the amount written in that letter. The format of the text is usually determined by the given institutions. But there are some situations that do not change and must be present.
One of them is the word that indicates that if the guarantee is for a period of time if it is not valid, it is indefinite. At the same time, the issuance date, the amount guaranteed, the bank, the institution to be given, and the necessary signatures are the factors that should be in a letter of guarantee. The remaining parts can be determined by the institution to which the letter of guarantee will be given.
How does a letter of guarantee work?
To use a letter of guarantee, you must apply to the bank. In your application, you specify how much of a letter you need and send the desired text format. Necessary examinations are made by the bank on your behalf, and if your limits are available at the bank, the letter of guarantee template is prepared as desired. In this way, you will be responsible to the bank for the amount written on the letter of guarantee you have.
The bank, on the other hand, will be responsible to the institution to which you will give this letter. You forward the letter you receive to the institution, and you gain authorization to take specific actions in the institution. In other words, your guarantee is as much as the amount you offer; You may be subject to transactions such as service or trade.
When we think in terms of the institution to which the letter of guarantee is given, we can say that the company guarantees itself. The person to whom the letter is received can buy and sell goods as they wish in return for the specified amount. But one thing to pay attention to here is the duration of the letter. If there will be a sale of goods, it is important that the maturity is less than this period so that when the letter of guarantee expires, you will have to take your debt for the goods by your own methods.
You don’t have any guarantee. If you have a sale of goods that are not paid in due time, you can have the letter reimbursed. So, you can get your debt back by applying to the bank. But if the letter of guarantee has expired, it is useless; it is straight garbage. No rights can be claimed. Therefore, the person holding the letter of guarantee should be careful in such cases.
How to Get a Letter of Guarantee?
Persons or institutions that need a letter of guarantee; can request a letter of guarantee by applying to the bank of which they are customers.
Parties to the Letter of Guarantee
There are three main parties in the letters of guarantee.
Guarantor: The Bank that issued the letter.
Beneficiary: The person whose debt is guaranteed by the bank, that is, the debtor.
Addressee: The creditor or the transaction is the flat, institution, or other real and legal persons.
Types of Letters of Guarantee
- Tender Guarantee
- Performance Guarantee
- Advance Payment Guarantee
- Retention Money Guarantee
- Payment Guarantee
- Standby Letter Of Credit (Sblc)
Letters of guarantee may be issued in a range of different forms, serve different types of purposes and cover very other subject matters. They are also required by many different kinds of parties and can be classified according to their applicability and issue date. Despite these differences, however, letters of guarantee share one defining feature: they all come with an expiration period. An expiry period is a specific time limit after which a particular type of letter becomes invalidly issued as per the provisions written within it.