Definition of the letter of guarantee :
Letter of guarantee is a document upon which the bank undertakes the guarantee of individuals and legal persons in connection with performing obligations and commitments of the subject of a mutual contract between the beneficiary and applicant up to the amount mentioned in guarantee letter. In case of failure to meet the obligations in due time by the applicant or with the announcement of beneficiary before the maturity expiration of guarantee letter, the bank will pay the mentioned amount in favor of the beneficiary.
Parts of a Letter of Guarantee :
- Subject of guarantee
Types of Letters of Guarantee :
Legal persons, letters of guarantee of companies in bids or tenders :
Companies, organizations and governmental institutions usually make the purchase or sale of their assets through tender or bid and for performing their projects or supplying their necessary services through tender. The people participating in tender or bid must submit a letter of guarantee alongwith their offer to the employer, so that in case of lack of fulfillment of obligation, it could be confiscated in favor of employer.
Legal persons, letter of guarantee for the smooth performance of obligations :
This type of letter of guarantee is issued to guarantee the on time performance of obligations by the applicant against the beneficiary. (The most prevailing types of these letters of guarantees are the guarantee of smooth performance of obligations resulting from signing a contract.
Legal persons, letter of guarantee for payment in advance :
To start the operations related to the contents of the contract and to equip the work place or complete the equipments, usually a percentage of contact amount is paid to the contractor by employer as a payment in advance in lieu of obtaining a letter of guarantee under the same title. These letters of guarantees reduce in line with the work progress and preparing the financial statements by employer.
Legal persons, letter of guarantee to restitute Retention Money Guarantee :
In order to be assured of the smooth performance of the job, employer deduces a sum as the smooth performance guarantee( guaranty) from the gross amount of financial statements of contractor for 10 percent of each financial statements and keep it in an account before him . This sum of performance guarantee can be returned to the contractor based on the request made by contractor or against bank guarantee. This letter of guarantee which is issued by bank and upon the request made by contractor and in favor of employer is known as Retention Money Guarantee.
Legal persons, customs guarantee:
If the owners of importing goods could not pay their customs duties in cash to clear it , they must deposit a sum equal to it in form of bank guarantee letter before customs. These types of letters of guarantee are issued based on certain maturity for example 6 months, 9 months,… or in installment. If the amounts of customs guarantee letters are not transferred in due time, they will be subject to payment of loss of delay in payment
Legal persons,payment letter of guarantee :
These letters of guarantee are issued by bank to accept the payment of debts in certain maturity
Legal persons, miscellaneous letters of guarantee :
These types of letters of guarantee do not have a specific form and are issued according the form instructed by the beneficiary and based on the request of applicant to guarantee specific cases.
Legal persons, conditional letters of guarantee :
In cases in which the client is not able to pay the whole or part of the cash deposit in the cases of advance payment letters of guarantees and retention money guarantee and asks the cash deposit to be supplied via in advance payment or guaranty, in that case , the requested letter of guarantee is issued conditionally. It is also necessary to mention and add to the printed text of the letter of guarantee that the credit of letter of guarantee is subject to the transfer of in advance payment or related guaranty to the related account before bank.
Qualifications of the applicants and necessary documents to issue the letter of guarantee :
Legal persons :
- Presenting a copy of the company constitution , the latest changes in members of board of director , authorized signatures and capital and any change in the main center of company in the official gazette
- Submitting an application for the issuance of letter of guarantee with the authorized signature and seal of company along with the letter of beneficiary or contract signed by beneficiary and by mentioning the type, sum and duration of letter of guarantee .
- Presenting full identity card specifications of the applicant ( members of Board of Directors ) and presenting the copy of tender documents ( on the case of letters of guarantee for participation in tender ) , a copy of contract or communiqué of job refer, subjects related to specifications of contract and method of payments ( on the case of smooth performance and in advance payment letters of guarantee)
- Having an account and at least having a suitable turn over , lack of having a bounced check and delayed payment in the side of applicant and guarantor
- Specifying the sum of cash deposit of letter of guarantee, sum of letter of guarantee , type of securities and guarantees and their rates , underwriters of the contract, guarantors and maturity of letter of guarantee
- Presenting a copy of I.D. Card and National I.D. Card
- Submitting an application for the issuance of letter of guarantee , preparing and adjusting the form of proposal of letter of guarantee while mentioning the type , sum and duration of letter of guarantee
- Accrediting the applicant and guarantors
- Presenting job documents
- Determining the sum of cash deposit , type of securities and their rates, underwriters of contract and guarantors and maturity date of letter of guarantee