Assurance has always played an important role in business. For both parties, establishing business relationships on a solid foundation is the key to successful collaboration. However, things may not always go as planned and therefore assurance mechanisms are needed. This is where the Letter of Guarantee comes in. In this blog post, we will discuss the concept of a Letter of Guarantee in detail and examine why it is so important in the business world.
What is a Letter of Guarantee?
Teminat Mektubu, bir işin yapılmasının, bir borcun ödenmesinin veya bir malın tesliminin belirlenen sürede ve şartlar uyarınca gerçekleştirileceğini garanti altına almak üzere ilgili firma adına Türkiye Finans tarafından alacaklıya verilen bir taahhüttür. Bu taahhüt, taraflar arasında güvence sağlamak ve ticari ilişkileri desteklemek amacıyla kullanılır.
Features of the Letter of Guarantee
A Letter of Guarantee has the following features:
The Letter of Guarantee can be issued in TL or foreign currency, for a period of time or indefinitely.
Depending on the nature of the work, it may be definite, temporary, advance or special commitment.
Letters of guarantee can be issued for issues such as purchase of goods, dealership collateral, contracting works, customs, court, tax office procedures.
Why Use a Letter of Guarantee?
There are many advantages of using a Letter of Guarantee:
A Letter of Guarantee secures the commercial relationship between the parties under bank guarantee.
It brings prestige as it shows the credibility of a reputable and reliable bank on your company.
It provides a cost advantage as it allows you to do business without tying up capital.
The counterparty company has the guarantee of receiving the price of the commitment from the bank in case the work is not completed.
How to Use a Letter of Guarantee?
The use of the Letter of Guarantee is quite simple. Here are the steps:
The Letter of Guarantee prepared by the bank after the evaluation of your request guarantees that the compensation to be paid will be collected from the bank in case the debt is not paid within the specified period or the work undertaken cannot be completed within the promised time.
The Letter of Guarantee makes the bank responsible to the institution to which you will give the letter and you responsible to the bank. You provide the necessary assurance by forwarding your Letter of Guarantee to the institution with which you will make a business contract.
Term Letters of Guarantee
Term Letters of Guarantee are letters that limit the bank's liability to the specified date and terminate the liability as of that date. These letters do not have a maturity or validity period on them, and unless they are returned, the bank's liability lasts until the end of the 10-year statute of limitations after the contractual relationship between the beneficiary and the addressee ends. They are very risky letters for banks. Letters of guarantee addressed to the government must be issued indefinitely.
Demand/Indefinite Letters of Guarantee
Letters of Guarantee provide the beneficiary to enter into business with the support of a reliable bank's payment commitment.
For the addressee, it provides the assurance of receiving compensation in case the work is not completed.
The parties to the letter of guarantee are the Bank and the Counterparty.
The beneficiary (customer) is not a party to the letter of guarantee.
A Letter of Guarantee is a symbol of assurance in the business world. It helps to establish commercial relations on solid foundations by ensuring that business is completed properly and payments are made smoothly. Therefore, it is important to consider the advantages of using a Letter of Guarantee in business.
