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A confirmed letter of credit involves two banks guaranteeing the availability of funds for an international transaction, providing added security for both the buyer and seller. It may be necessary for transactions involving unstable countries. Once the goods are shipped, funds are released according to the terms of the letter of credit.
A letter of credit is a document used in international transactions. It is issued by the buying company’s bank to assure the selling company that the buying company has the money available to transfer to the seller once the purchased goods are received. A confirmed letter of credit is equivalent to a second opinion: some sellers require one from a second institution to ensure the money is available.
The seller of the goods usually has its own bank involved in the transaction. The original letter of credit from the issuing bank is sent to the bank representing the seller. The two banks work together to promote the transaction between the buyer and the seller in the international transaction. Both banks remain involved throughout the entire process. The participation of both banks includes the original letter of credit and the confirmed letter of credit.
Essentially, a confirmed letter of credit involves two banking or financial institutions that have money for the business that is buying the goods. This is a double guarantee that if indeed one of the banks cannot cover the cost of the goods, the second institution will have enough money to cover the amount of goods the buyer is buying.
Usually, the seller of the goods requires a letter of credit to guarantee that you will receive the money owed once you ship the goods. This document also protects the buyer because he does not have to prepay for the goods until he receives confirmation that the goods have actually been shipped. The confirmed letter of credit is simply added insurance to both parties that the goods will be paid for and received according to the agreement.
A confirmed letter of credit is not only double insurance, but may be a necessity for transactions involving certain countries. Countries experiencing political or economic instability may require a second financial institution to participate in each of their international agreements, instead of relying solely on the original letter of credit.
Once the letter of credit and confirmed letter of credit are received, the seller usually ships the goods. Once the buyer’s bank receives confirmation that the goods have been shipped, the funds are released in accordance with the terms and conditions set out in the letter of credit and supporting document.
Smart Asset.
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