A letter of guaranty (sometimes spelt guarantee) is commonly issued by banks on behalf of a client, to reassure a supplier that payment for goods will be made. In some cases the bank will promise to meet payments, even if their client defaults. This gives two parties who may have previously not done business together the added security to do so.

A similar document may be issued on behalf of a call writer, when their underlying asset isn’t held in the account, giving reassurance that the asset will be delivered if the call is exercised.

Letters of guaranty are used in many other scenarios as a way to assure continued high standards, that an obligation will be met, or a rule will be adhered to. For example companies subject to Food and Drug Administration regulations may use a letter of guaranty to certify that their products meet the standards of the law.

A letter of guaranty is often used  with checks, where a bank will guarantee the funds will be available – up to a certain amount – to be withdrawn using a check on a certain account. This document is just another level of safety for people doing business with an individual, knowing they have available funding. It is especially important when paying by check for purchases over $1000.