What is a Letter of Guarantee?
A letter of guarantee, also known as a bank guarantee or performance bond, is a written assurance from a bank or financial institution that the obligor will meet its financial obligations if the principal fails to do so. It is a form of credit that provides security to the creditor, ensuring that the obligor will fulfill its promises and obligations. In essence, a letter of guarantee acts as a guarantee that the principal will honor its commitments, thereby mitigating the risk of default for the creditor.
Letters of guarantee are commonly used in various contexts, including international trade, construction projects, and financial transactions. They serve as a means to build trust between parties and facilitate transactions where there may be a lack of confidence in the obligor’s ability to fulfill its obligations. In this article, we will explore the different types of letters of guarantee, their purpose, and the benefits they offer to both the obligor and the creditor.
