+971 56 416 6426 | Our Location: Office 2609, Bay X3 Tower, Cluster X, JLT, Dubai, UAE

Home / Blog / What Is A Letter of Guarantee and How Does It Work?

What Is A Letter of Guarantee and How Does It Work?

Letter of guarantee is a crucial financial instrument that you need to have when dealing with international trade partners as an exporter. The guarantee letter for payment is basically a commercial documentary device issued by the concerned bank that removes the risk of non-payment. If the buyer doesn’t pay you for the order that you have supplied, the bank pays you on behalf of the importer. In this case, the bank plays the role of a guarantor.

Case of Overseas Trade

It is convenient to look at various situations in the arena of international trade to know about the working of a letter of guarantee. Suppose you have a client in Europe. He wants an order to be supplied. But you are unsure of payment. On the other hand, the potential importer is not confident of receiving the order once he has made payment in advance. In this case, the importer obtains a letter of guarantee from a top bank and sends it to you. The letter assures you full payment of the order even if the buyer fails to do so. After receiving it, you can safely export the goods.

Case of Overseas Trade

Case of A New Supplier

Suppose you are a new supplier who has recently started business in international trade. You need a payment guarantee from the customers as you are not well-acquainted with the buyers. The importer or the buyer needs to obtain a letter of guarantee from the bank and provide it to you. While getting the letter, the buyer needs to place all the details of the trade contract to the bank. The bank officials study the contract, prepare the guarantee letter and issue it to the importer. The importer sends the letter to the exporter, which means you. You can start active trading after receiving the guarantee in form of the letter.

The Start-Up Companies

Assume that you own a start-up business in the UAE. How are you going to expand it? Suppose you need some supplies of machine tools or technology products to grow your business. What are the methods you are going to implement to procure them? The suppliers will not trust you straightaway on payment issues. In such situations, it is rational to get a letter of guarantee from a bank to prove your credit worthiness. Use the letter as a proof to conduct the business operations as a start-up.

Start-Up Company‚Äč

Consult A Top Company

Capital is your one-stop solution provider when it comes to establishing your business in the competitive arena of international trade. Consult them for a wide range of financial services.