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What Is a Letter of Guarantee?

A letter of guarantee is a piece of documentation that can be requested from your bank or other financial institution with the purpose of providing additional support for a transaction or contract. A letter of guarantee basically provides concrete confirmation that an individual, who is a client of that bank, has engaged in a transaction and that any financial commitments related to that transaction will be met.

In some cases, a letter of guarantee is also used in underwriting. For example, this scenario can come up when an individual or entity wants to invest in something and needs to put up an asset as collateral. The bank can then write a letter of guarantee stating that the asset or collateral indeed does exist and that it can be accessed in case the individual is unable to meet his financial obligations.

A letter of guarantee is not a long document although it does contain specific details. In most cases, a letter of guarantee will state information such as the identity of the buyer, what his relationship to the bank is, and information on the asset. Since there can be many different types of assets, the nature of the asset will be specifically stated, as well as its value.

A letter of guarantee can be very useful for people who may have lower than desired credit scores. It can also be useful for those who may be faced with a business opportunity that may otherwise be impossible for them. In other words, having a letter of guarantee can open up doors.

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