A letter of guarantee is a written commitment by the bank to a third party with whom you have signed a contract (the “beneficiary”). It requires the bank to pay a certain sum if you (or a third party) don’t respect your financial obligations or the requirements of the contract. Once the bank has paid the beneficiary, you reimburse the bank the amount that was paid.
- Companies that do business in Canada or abroad with the state or other entities
- Companies that sign contracts/agreements under which they must provide cash amounts, guarantees or other securities
- Companies that require a bid guarantee* or a performance guarantee** to conduct transactions
- Elimination or partial reduction of the cash amount, guarantee or other security you must provide to the other party in the contract; contributes to increasing your cash flow
- Possible advantage in obtaining contracts both here and abroad
- No obligation to pay for products or services in advance, allowing you to allocate your funds to other purposes while waiting for payment due dates
* The buyer usually requires a bid guarantee when issuing a call for tenders related to a contract. This ensures that the buyer will be paid if the bidder who wins the contract doesn’t execute it appropriately.
** The performance guarantee ensures that the buyer will be paid if you don’t perform under the contract appropriately.