Letter of Guarantee - Definition
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What is a Letter of Guarantee?
A letter of guarantee is used in supplier-buyer relationships. The letter of guarantee is essentially a contract that a supplier receives from the purchaser's bank to assure payment after supply of goods. The bank guarantees payment for the shipment if the buyer is unable to pay. The buyer arranges the letter of guarantee as a form of assurance to the supplier.
Apart from supplying goods, the bank can also issue a letter of guarantee in the following business areas:
- When a construction company is employing new contractors
- Leasing of lands, buildings, and large equipment
- Declaring the import and export of goods
- Financing from large financial institutions