What Is a Letter of Guarantee? How Is It Obtained and Where Is It Used?

A letter of guarantee is a strong financial assurance tool used in many business relationships, from public tenders to high-value commercial contracts. This article explains what a letter of guarantee is, how it is obtained, its different types, and general information about related fees and commissions.

In both public tenders and large-scale private sector agreements, parties often request additional security to ensure that contractual obligations will be fulfilled. One of the most common instruments providing this assurance is a letter of guarantee. As of 2026, with stricter risk assessment criteria in banking and finance, letters of guarantee have become even more critical in demonstrating a company’s financial reliability.

What Does a Letter of Guarantee Mean?

A letter of guarantee is an official written document in which a bank undertakes to pay a specified amount if its customer fails to fulfill obligations toward a third party or institution.

This structure involves three main parties:

Bank: The financial institution issuing the guarantee
Beneficiary (Applicant): The business on whose behalf the guarantee is issued
Obligee (Counterparty): The party requesting the guarantee

Through this mechanism, risks between parties—especially in high-value transactions—are reduced and commercial trust is strengthened.

How Is a Letter of Guarantee Obtained?

Although procedures may vary slightly between banks, the general process includes the following steps:

The company submits a formal request to the bank.
The bank evaluates the company’s financial position and credit history.
An appropriate collateral structure is determined (cash collateral, mortgage, surety, etc.).
Commission rates and guarantee terms are agreed upon.
The letter of guarantee is issued and delivered to the counterparty.

Up-to-date and well-prepared financial statements help speed up the evaluation process.

Who Can Obtain a Letter of Guarantee?

The following individuals and businesses may apply for a letter of guarantee:

Sole proprietorships
Limited liability companies
Joint-stock companies
Contractors
Subcontractors
Companies participating in public or private sector tenders

Banks assess the applicant’s financial capacity, credit score, and ability to provide sufficient collateral before making a decision.

Required Documents for Application

Banks generally request the following documents:

Tax certificate
Signature circular
Trade registry gazette
Updated balance sheet and income statement
Certificate of activity
Relevant contract or tender documents

The required documentation may vary depending on the type of letter of guarantee requested.

How Is a Letter of Guarantee Used?

A letter of guarantee is submitted to the counterparty during contract signing or at the tender application stage. Through this document, the bank guarantees that the company will fulfill its contractual obligations.

If the company fails to meet its commitments, the counterparty may directly claim the specified amount from the bank. For this reason, letters of guarantee are essential tools for reinforcing trust, especially in high-value projects.

What Are the Advantages of Using a Letter of Guarantee?

The main benefits for businesses include:

Enhancing commercial credibility
Reducing the need for advance payments
Enabling participation in public and private tenders
Supporting more effective financial risk management in large projects

In this respect, a letter of guarantee is not merely a document but a strategic financial instrument that expands a company’s business capacity.

Essential Elements of a Letter of Guarantee

For a letter of guarantee to be valid, it must include:

Official details of the issuing bank
Information about the beneficiary and the counterparty
The guaranteed amount
The purpose of the guarantee (related contract or project)
Expiry date (for time-limited guarantees)

These elements are crucial for both legal validity and practical enforceability.