Legal Definitions - guaranty letter of credit

A guaranty letter of credit is a type of standby letter of credit that is used to guarantee either a monetary or non-monetary obligation. It is issued by a bank at the request of a customer, and the bank agrees to pay the beneficiary if the customer defaults on their obligation.

For example, if a construction company is hired to build a new office building, the owner of the building may require the construction company to provide a guaranty letter of credit. This ensures that if the construction company fails to complete the project or does not meet the agreed-upon standards, the owner can draw on the letter of credit to cover the cost of hiring another contractor to finish the job.

Another example is when a supplier requires a guaranty letter of credit from a buyer to ensure payment for goods or services provided. If the buyer fails to pay, the supplier can draw on the letter of credit to receive payment from the bank.

In both cases, the guaranty letter of credit provides a level of security for the beneficiary, ensuring that they will be compensated if the customer fails to fulfill their obligation.