What Is a Confirmed Letter of Credit?
A confirmed letter of credit is a letter of credit where the seller or exporter has a payment guarantee from a second bank or a confirming bank. This is done in case the first bank fails to pay, then the payment will be done by the second bank. This trade payment method is used for international trade.
How Important is a Confirmed Letter of Credit?
The aim of obtaining any type of letter of credit is the sense of security that comes with it especially for the seller. In the case of an international transaction, the holder of a letter of credit which is the seller must be assured that he will get the payment from the issuing bank once he complies with the terms of payment. However, this is not always the case. Sometimes, the seller is unsure whether he will receive the payment against his goods or not. This uncertainty may stem from numerous factors like questionable creditworthiness of the issuing bank or political or economic vulnerability linked with the geographical location of the issuing bank.
Parties Involved in a Confirmed Letter of Credit
The following parties are involved in a confirmed letter of credit. One additional party compared to a normal letter of credit is the confirming or second bank.
- The buyer
- The issuing bank
- Confirming bank
- Correspondent bank
Advantages of Confirmed Letters of Credit
A confirmed letter of credit or second letter of credit comes with advantages for both the seller and the buyer by protecting the interest of both parties. Here they are:
- A confirmed letter of credit gives the seller assurance that he will receive payment after the goods have gotten to the buyer’s destination. Where the buyer fails to pay, the bank will assume responsibility for the payment.
- The second letter of credit reduces the risk of default. This is because another bank will assume the responsibility of making payment to the seller where the first party can’t pay.
- For the buyers, they are assured that they will get the requested goods and services from the seller when they obtain a confirmed letter of credit.
Terms to Look-Out For
Note that there are costs involved in using a letter of credit. Banks make charges for providing an LC, so it’s important to weigh the costs against the security benefits.
For exporters, you’ll only receive a payment if you keep to the strict terms of the letter of credit. You will have to give proof that you have supplied exactly what you were to supply. Note, however, that using a letter of credit can sometimes cause delays and other problems.
The Different Types of Letters of Credit
A revocable letter of credit is not very common because it can be changed or canceled by the bank that issued it at any time and for any reason.
In this letter. credit cannot be changed or canceled except all the parties involved agrees. Irrevocable letters of credit offer more security than revocable LC.
A confirmed letter of credit is one to which a second bank, mostly in the exporter’s country affirms. it shows by undertaking that payment will be made. This LC is used when the exporter does not find the security of a credit solid enough. Simply because of the issuing bank risk of political and/or economic risk linked with the importer’s country.
An irrevocable confirmed letter of credit does not only have the commitment of the issuing bank. But also has a binding undertaking. This is given by the confirming bank to pay when the documents are presented in accordance with the terms and conditions of the credit. Thus, a confirmed letter of credit offers more security than an unconfirmed LC.
An unconfirmed letter of credit is one that has not been confirmed by any bank other than the bank that opened it. Here, the advising bank forwards the LC to the beneficiary without undertaking on its part but confirms it’s real.