Letters of guarantee and standby letters of guarantee
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.
Target clientele
- 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
Advantages
- 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.
