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What is the purpose of a letter of guarantee?

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Quick Answer

A letter of guarantee helps ensure collection of funds for both international and domestic transactions. Both a buyer and a seller can receive additional financial security under a letter of guarantee. A letter of guarantee requires a bank to reimburse for a failed payment or undelivered products, reports Houston Chronicle.

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Full Answer

A letter of guarantee is similar to a letter of credit with the exception that a letter of guarantee insures either party in a transaction. The party seeking the letter of guarantee requests it from the other party prior to the transaction. In some instances, a customer does not pay or the seller does not deliver the good or provide the appropriate service. Countries have differing collections laws, and a letter of guarantee serves as additional financial security that a party in a transaction fulfills an obligation.

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