Letter of Guarantee (L/G)

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Letter of Guarantee issued by European Merchant Bank

A Letter of Guarantee is a pivotal financial tool designed to ensure the performance of a contract or obligation. It acts as a bank’s formal pledge to pay the beneficiary a certain amount if the party requesting the guarantee fails to meet their contractual obligations. This instrument is essential in various transactions, offering peace of mind and financial security to all parties involved.

European Merchant Bank issues both local and foreign letters of guarantee of different types. EMBank will provide a custom-tailored letter of guarantee for your needs.*

* Please confirm all guarantee letters directly with EMBank before utilization.

How Does Letter of Guarantee Work?

A Letter of Guarantee involves three parties: the applicant (who requests the guarantee), the beneficiary (to whom the guarantee is provided), and the issuing bank. The bank issues the guarantee on behalf of the applicant, providing a safety that the obligations under a contract will be met. If the applicant defaults, the bank compensates the beneficiary up to the amount specified in the guarantee.

 

What Are The Types Of Letter Of Guarantee?

Letters of Guarantee can be classified into several types based on their purpose and the nature of the transaction:

  • Tender guarantee (Bid Bond): Ensures the bidding company will enter a contract if selected.
  • Performance Guarantee: Assures that a project will be completed per the contract terms.
  • Advance Payment Guarantee: Secures the return of advance payments made by the beneficiary if the agreement’s terms are not fulfilled.
  • Warranty Guarantee: Covers the warranty period following project completion, ensuring any necessary repairs or adjustments are made.
  • Financial Guarantee: Promises payment of a specific amount to the beneficiary under the contract.

Customs Guarantee: Used for companies dealing with import and export, covering duties and taxes to customs authorities.

What Is The Issuing Process For a Letter Of Guarantee?

The steps involved in issuing a Letter of Guarantee include:

 

  1. Application Submission: The applicant (business or individual) approaches a bank to apply for a Letter of Guarantee, providing detailed information about the transaction requiring the guarantee.
  2. Documentation Review: The bank reviews the application and the required documents, which usually include financial statements, the underlying contract necessitating the guarantee, and any other relevant documentation.
  3. Credit Assessment and Approval: The bank assesses the applicant’s creditworthiness and the risk associated with the guarantee request. This assessment may involve analyzing the applicant’s financial health, the business’s stability, and the transaction’s specifics. In same cases pledge collateral can be requested to secure the issued guarantee amount. 
  4. Terms Agreement: Once the assessment is satisfactory, the bank and the applicant agree on the terms of the Letter of Guarantee, including the amount, fees, expiry date, and any conditions under which the guarantee could be called.
  5. Issuance: After the terms are agreed upon, the bank issues the Letter of Guarantee, officially committing to pay the beneficiary if the applicant fails to meet the specified obligations.
  6. Fee Payment: The applicant pays the bank a fee for issuing the Letter of Guarantee. This fee is usually a percentage of the guarantee amount and may vary depending on the risk assessment and the guarantee duration.

Advantages:

  • Enhances trust between parties, facilitating smoother transactions.
  • Provides financial security and assurance to beneficiaries.
  • Enables companies to undertake significant contracts or transactions.
  • Offers a safeguard for advance payments and performance obligations.

Conditions:

  • The applicant must have a satisfactory credit standing.
  • The bank may require adequate collateral or security.
  • Fees apply, varying by bank and type of guarantee.
  • Specific terms and conditions must be met for the issuance and validity of the L/G.

Please visit Fees and Commissions page to see the applicable fees.

Frequently Asked Questions

What Are The Fees And Commissions For Guarantee Agreements?

The fees and commissions for guarantee agreements vary depending on the guarantee amount and the transaction’s risk assessment.

Check them here.

What Are The Required Documents For Letter Of Guarantee?

The required documents for obtaining a Letter of Guarantee from a bank include:

 

  • Application Form: A completed application form for the Letter of Guarantee, provided by the bank.
  • Agreement Contract: A copy of the contract or agreement that requires the Letter of Guarantee, detailing the obligations of the involved parties.
  • Financial Statements: Recent financial statements of the applicant to assess financial stability and creditworthiness.
  • Business Registration Documents: Proof of the applicant’s business registration and legal status, such as a certificate of incorporation.
  • Identification Documents: Valid identification documents of the individuals authorized to act on behalf of the business, such as passports or national ID cards.
  • Collateral Information: Details of any collateral offered against the Letter of Guarantee, if applicable.
  • Credit Information: The applicant’s credit history and current credit standings, such as credit reports.
When Are Letters Of Guarantee Used?
Letters of Guarantee are used in various scenarios, including bidding for projects, ensuring performance under a contract, securing advance payments, and guaranteeing warranty obligations, among others.
What Is The Difference Between A Letter Of Credit And Letter Of Guarantee?
A Letter of Credit is primarily used in international trade transactions to ensure that payment will be received for goods shipped. At the same time, a Letter of Guarantee provides a financial guarantee to a third party that the applicant will fulfill a specific obligation.
What Is The Difference Between A Commercial Letter (CLC) Of Credit And A Letter Of Guarantee?
A Commercial Letter of Credit (CLC) facilitates transactions in the sale of goods, ensuring payment upon fulfilling specific terms, while a Letter of Guarantee serves as a security for fulfilling contractual obligations or payments.
What Is Letter Of Guarantee Usually Used For?
It is typically used to secure payment obligations, ensure contract fulfillment, cover advance payment returns, and guarantee warranty terms in business transactions.
Which Parties Letter Of Guarantee Involves?
It involves three parties: the applicant (who requests the guarantee), the beneficiary (to whom the guarantee is given), and the bank (which issues the guarantee).
What Is a Personal Letter Of Guarantee?
An individual issues a Personal Letter of Guarantee to guarantee the performance of contractual or payment obligations, often backed by personal assets.
How Long Is A Letter Of Guarantee Valid?
The validity of a Letter of Guarantee is determined by the terms agreed upon issuance. It typically lasts until the obligations are fulfilled or until a specified expiry date.