A bank guarantee letter is a document issued by a bank in which the bank promises to pay a certain amount of money to a beneficiary in the event that its client (the debtor) fails to fulfill their contractual obligations. It acts as a firm commitment that “if X does not do what they promised, the bank will pay on their behalf.”
Who issues it? A bank, at the request of its client.
- For whom? For a third party (the beneficiary), usually a company or a public institution.
- Purpose? To guarantee that the person who is the bank’s client will fulfill their commitments (e.g., payments, deliveries, works, etc.).
**Examples of situations in which it is used:**
- Commercial contracts: Company X wants to deliver products to Company Y. Company Y requests a bank guarantee letter as a safeguard that, if Company X fails to deliver, it will receive the money back from the bank.
- Construction contracts: A construction company receives an advance payment and must guarantee that it will properly fulfill its work.
- Public tenders: To participate, you often need to submit a participation guarantee — often in the form of a bank guarantee letter.
**Main types:**
- Good performance guarantee letter – guarantees that the work or service will be done properly.
- Advance payment guarantee letter – if you receive money in advance, you guarantee that you will return it if you do not complete the work.
- Tender participation guarantee letter – proves your seriousness when participating in a tender.
**What does a bank guarantee letter generally look like?**
It includes
- **Client’s details (the guaranteed party)**
- **Beneficiary’s details (the protected party)**
- **Guaranteed amount**
- **Validity period**
- **Conditions under which the bank will pay the money**
Good to know:
**As usual, it is a paid service (annual or monthly fee).**
The bank does not pay automatically – it only pays if the beneficiary makes a justified payment request, according to the conditions in the letter.
**The bank may require the client to provide guarantees (e.g., blocking a sum, mortgage, etc.).**
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