Here’s Why You Might Need a Letter of Guarantee
A letter of guarantee (LG) is beneficial in mitigating risks associated with the failure of payment. When the buyers sign an LG, it ensures the seller that they will be paid for the goods or services by the bank, in case the buyer or the company is unable to make the payment for themselves. This not only helps in maintaining the credibility of the buyer as well as help restore the seller’s trust in them. Most people often confuse a letter of guarantee with a commercial letter of credit (CLC). When you sign an LG, the bank has the power to step in only when the buyer fails to make the payment for the goods bought, while, under CLC, the bank makes a commitment to pay to the seller directly, whether the company is capable, or not. Apart from purchasing goods and services, one can also use an LC to make investments in trading, contracting out, and so much more.
If you are a new supplier in Dubai then you need a letter of guarantee because since it is the first time you are entering into business with any said buyer, you do not have a history of transactions and there is a lot of risks associated with both the parties.
In the early stage of inception, most companies are not financially sufficient to purchase goods, thus they ask their banks to write an LG, which could be used to assess the supplier’s credibility and their ability to pay.
When you are entering a foreign market, a letter of guarantee acts as a certificate of assurance for the exporter, as well as a commitment to the importers that they will receive payment for the said products. This also proves beneficial when the suppliers incur extra costs when exporting the goods to a different country.
Less Financial Risk
The need for an LG arises only when the buyers are unable to make payment for the goods they bought. To avoid mistrust between sellers and buyers and reduce financial risks, the banks issue an LG and act as a benefactor to the seller.
When a buyer applies for LG, the banks assess the financial stability of the buyer and their business that enhances the credibility of the company as it is backed by a credible bank. This trust would improve the performance of the business and reduce the chances of default.