Letter of Guarantee, LG
Letter of Guarantee — is the commitment of the guarantor (bank, financial institution or insurance company), issued on behalf of the client (the principal) and for his expense, to pay the receiver of the letter of guarantee (the beneficiary) the sum of money according to the agreement between the client and the receiver.
The letter of Guarantee is an additional form of payment security or the fulfillment of other contractual commitments. This means that with the proper fulfillment, by the involved parties, of their contractual obligations under a foreign trade (or other) deal, the letter of guarantee is to remain unused, and the payment is to be made only upon the arising of a guarantee case.
The basis for a payment, to be made upon a letter of guarantee, is to be served by a written notice of the beneficiary of the failure of the principal to meet their contractual obligations. Payment is to be made upon the presentation of a written demand of the recipient and also upon the presentation of additional documents which are mentioned of inside the letter of credit. The letter of guarantee - a universal instrument which is successfully used in international business operations, is a reliable way of ensuring that client’s commitments are met in foreign trade operations.
Letters of guarantee (in the case of the import of goods, jobs or services) are issued for the provision of more favorable delivery conditions.
Having a letter of guarantee, the beneficiary (the seller) can provide the principal (the buyer) with a trade credit (a delay in payment), increase the contract value or the delay period or provide an additional discount for the purchased goods etc.
The beneficiary (the seller) knows that the risk of non-payment by the principal (buyer) for the delivered goods (jobs done, services provided) is already covered by the letter of guarantee.
The letter of guarantee is a very flexible and convenient financial instrument: if an agreement has been reached with the seller about the use of the letter of guarantee and the buyer has been presented with an deferent of payment, then the buyer can independently plan the procurements and the settlement with the seller, provided that the sum owed by the buyer to the seller does not exceed the sum of the bank guarantee.
The letter of guarantee is beneficial for the buyer because of its low cost and ability to provide extra commercial benefits from the seller.
We issue the following types of letters of guarantee
- Performance bond guarantee - a letter of guarantee issued to ensure the proper execution of the contract (delivery of goods of the stipulated quality and package content within the established deadlines etc). As a rule of thumb, it is issued for 5% - 20% of the contractual amount.
- Payment guarantee - a letter of guarantee ensuring the commitment of the buyer to pay the stipulated sum according to the contract.
- Advanced payment guarantee – a letter of guarantee ensuring the commitment of the seller to return the down payment, transferred to him by the buyer under the terms of the contract.
- Tender bond guarantee (bid bond) - a letter of guarantee ensuring that the participant of the tender fulfills his tender commitments. As a rule of thumb tender commitments consist in the signing of a standard form contract and the presenting of a performance bond guarantee (as a rule of thumb, issued for 1% - 5% of the contractual amount).
- Loan guarantee – a bank letter of guarantee that is issued in favor of the creditor ensuring the commitment of the borrower to return the credit, granted to him by the creditor.
- Re-exportation guarantee – a letter of guarantee ensuring the commitment of the party, performing the duty-free importation of equipment into the country with the obligation to export it within a given period of time (for example: to be able to demonstrate it at an exhibition etc.)
- Investment obligations guarantee - a letter of guarantee ensuring of the commitment of the investor to carry out his investor commitments. As a rule of thumb, it is required, as one of the conditions of participation in the tender for the purchase of shares.
- As a rule of thumb, letters of guarantee are issued for the period of one (1) year and one (1) month.