Our brother-in-law Henry is a nice enough guy, but he’s absolutely horrible with money and has several failed business ventures under his belt. Normally, we don’t concern ourselves with his financial ineptitude—that’s our sister’s problem—but his newest business idea has led him straight to our company’s door. We manufacture heavy equipment, and he wants to buy a tower crane for his soon-to-be-formed real estate development company.
A good tower crane can cost about a million dollars to buy, which is why most construction and development businesses rent them instead. But Henry insists he has to buy one, and he wants us to sell it to him. Surprise, surprise, he doesn’t have the money for it up front, so he’ll need to take out a loan. We’re not sure about this, so we request a letter of guarantee from his financial institution.
A “letter of guarantee” is basically a letter from the bank promising that, even if Henry defaults on his tower crane loan payments, the bank will cover his debt. They might not cover all of it—for example, they might just guarantee the principal of the loan but not any interest it accrues—but it does offer us a little financial protection when (er...if) Henry’s big ideas don’t pan out.
Letters of guarantee can also be used in other areas of the financial investment world. If we write a call order for a thousand shares of stock, our bank can issue a letter of guarantee promising that (a) we actually own the stock we’re trying to sell, and (b) those shares will be delivered if the option is exercised.
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Finance: What is a Surety Bond?0 Views
Finance allah shmoop What is a surety bond Think sure
It t like certainty Remember when you were a kid
at summer camp and had to pony up a buck
to prove your heavy roller status at friday night's poker
game And then there was a buddy who promised to
pay more than that if you lost more than your
buck Well surety bonds air kind of like that We
repeat kind of a surety bond is an agreement between
three parties One party guarantees that a second party will
fulfil a promise to the third party For example one
signer might guarantee that a small business will honor a
government contract That is that small business will have to
go borrow a whole bunch of money to go build
a bunch of fence wire stuff for the government that
they would need somewhere in the south And then some
bigger contractor would guarantee that that small business will in
fact perform on the contract If the small business doesn't
perform the contract like as guaranteed building whatever fencing materials
and the government wanted to build will the person who
signed on their behalf would likely have to either pay
up or build the fence themselves The big guy i
either guarantor gives the little guy the principal surety in
delivering the contract to whoever wants it toe happen A
k a The oblige g remember that song about the
government there yet oblige E ope elijah Life goes on
Sorry we're done anyway all the parties involved bond with
certainty the delivery of whatever product or service that surety
bond is standing behind So yeah that's what it is 00:01:36.669 --> [endTime] And don't call us surety
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