Letter of guarantee is an instrument that enables the companies to carry out commercial activities abroad. It is a guarantee contract addressed to the beneficiary regarding an obligation (the delivery of a good, the completion of a work, the payment of a debt etc…) by a principal. It includes the undertaking to pay the amount of the letter immediately upon the first written demand of the beneficiary, without the need for obtaining the consent of the principal, in case the said obligation is not fulfilled by the principal.
Letter of guarantee is an assurance that protects the beneficiary.
Parties of a L/G:
- Guarantor: The bank that gives the guarantee.
- Beneficiary: The party receiving the guarantee.
- Principal: The party whose action is guaranteed.
We can issue a L/G in 3 ways:
- L/G with wet signature: This is a letter issued by our Bank in paper form, signed with wet signature.
- L/G via SWIFT: It is a letter prepared by our Bank, sent via SWIFT to the correspondent bank agreed upon by the parties, and notified to the beneficiary by the correspondent bank without undertaking any responsibility.
- Counter-guarantee: A letter in which more than one bank undertakes the risk is a counter-guaranteed letter. It is used when the beneficiary demands the assurance of a bank resident in its own country instead of the direct guarantee of a bank located abroad. In this case, the correspondent bank is authorized to issue its own letter addressed to the beneficiary, under the guarantee of our Bank.
Letters issued by foreign companies to our domestic companies can also be arranged in the same 3 ways.
For the letters sent abroad, the limit of the company is used. For letters sent from abroad, the limit of the correspondent bank is used.
Types of L/G
- Tender Guarantee or Bid Bond:
This is a letter given to the tender authority in favor of the firm participating in the tender. It gives the tender authority the right to claim payment if the participant does not fulfill the tender conditions.
This is a letter of guarantee that gives to beneficiary the right to claim payment in case the contractual obligations are not fulfilled by the principal, partially or completely.
- Advance Payment Guarantee:
This is a letter of guarantee that gives to beneficiary the right to claim repayment of the advance payment made to the principal in line with the business relationship between the two parties.
This is a letter that guarantees the payment obligation of the buyer to the seller in accordance with the purchase agreement between the two parties.
This letter is given in the presence of a loan agreement between the lender and the loan requester. The lender has the right to claim repayment in case the loan requester fails to fulfill its payment obligations pursuant to the said loan agreement.
This is a letter of guarantee issued to ensure that the goods delivered are solid and working for a period specified in the contract between the two parties.
This is a letter of guarantee given in order to ensure that the goods or services are paid in full without any precautionary deductions that can be made by the employer in order to prevent problems that may arise in the delivered goods or services, pursuant to the contract made between the two parties.
Standby Letter of Credit (SBLC)
A standby letter of credit is given as an assurance that payment will be made if an obligation to the beneficiary of a letter of credit is not fulfilled or if a specified event occurs or does not occur.
In other words, if the principal of the SBLC fails to fulfill an obligation against the beneficiary, the bank that gives the SBLC guarantees to make payment to the beneficiary upon beneficiary’s written demand (and other documents requested according to SBLC, if any).
Frequently Asked Questions
- What is the difference between a letter of credit and a letter of guarantee?
In the letter of credit, the bank's payment obligation arises as a result of the fulfillment of an act. On the contrary, in the letter of guarantee, the bank's payment obligation arises as a result of the failure to fulfill an act. In addition, SBLC’s and L/G’s may differ in terms of the rules they are subject to. While SBLC’s are subject to ISP98 (International Standby Practices), L/G’s may be subject to URDG 758 (ICC Uniform Rules For Demand Guarantees Pub. No.: 758).
- Is it possible to add confirmation to L/G?
Confirmation cannot be added to L/G’s. If the beneficiary demands a bank in his country to give the guarantee, then the counter-guarantee method is applied.
