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What is a confirmed letter of credit?

A confirmed letter of credit is a financial instrument used in international trade to provide security and assurance to the exporter and importer. Learn more in this blog.

Ensuring secure and reliable transactions is important in international trade. One of the commonly used documents for export transactions is a letter of credit — a document sent from a bank or financial institute that guarantees that a seller will receive a buyer’s payment on time and for the full amount. There are many types of letters of credit that are used by exporters depending on the kind of business transaction and other factors.

What is a confirmed letter of credit?

A confirmed Letter of Credit is a financial instrument used in international trade to provide security and assurance to both the exporter and importer. It acts as a guarantee of payment for the exporter and also safeguards the importer by guaranteeing the delivery of the specified merchandise.
What sets a confirmed LC apart is the involvement of two banks: the issuing bank and the confirming bank. The issuing bank, located in the importer’s country, initiates the LC and undertakes the responsibility of making payment. However, to enhance security, a confirming bank, usually located in the exporter’s country, adds its confirmation to the LC. This confirmation acts as a secondary guarantee¹.

Advantages of a confirmed letter of credit

A confirmed LC offers many advantages. For an exporter, it assures payment once the goods or services have been delivered. In the event of non-payment by the importer, the issuing bank takes the responsibility of payment, reducing the risk of default.
Buyers or importers benefit from a confirmed LC as well since it ensures that they will receive desired goods and services from the exporter.

Disadvantages of a confirmed letter of credit

Firstly, the process of obtaining a confirmed LC may take longer due to the involvement of an additional bank. Secondly, the fees associated with confirmed LCs are generally higher compared to unconfirmed LCs. The presence of a confirming bank adds an extra layer of financial responsibility, resulting in increased costs for the parties involved. It is important for businesses to evaluate financial implications and weigh the benefits against the potential drawbacks when considering the use of a confirmed LC.

Parties involved in a confirmed letter of credit

Here are the key participants involved:

Importer (buyer)

The importer applies for a confirmed LC from their issuing bank, specifying the terms and conditions of the transaction.

Exporter (seller)

The exporter receives the confirmed LC and must fulfill the specified conditions, including delivering the goods or providing the services within the agreed-upon timeframe and following the terms outlined in the LC.

Issuing bank

The issuing bank is the importer’s bank and issues the confirmed LC on behalf of the importer.

Confirming bank

The confirming bank is a bank located in the exporter's country and adds its confirmation to the confirmed LC. It acts as a secondary guarantor, assuring the exporter of payment in case the issuing bank fails to fulfill its payment obligations.

How do you obtain a confirmed letter of credit?

The process begins with the importer submitting a comprehensive credit application. This is similar to applying for a loan. The terms of the confirmed LC usually outline the payment that the bank may need to make as a loan to the importer including an interest rate and repayment schedule. The bank carefully evaluates the importer’s creditworthiness and assesses the transaction’s viability before deciding whether to issue a confirmed LC.

Visit Exports Compliance Dashboard to meet your documentation requirements

As transactions include shipment of goods from one country to another, it provides assurance to the exporter for payment upon meeting the agreed conditions. With e-commerce exports, reaching international customers and receiving payments is easy and simple. Amazon Global Selling not just enables you to sell across 200+ countries and territories but also receive payments directly in your bank in INR or other currency of your choice.

Amazon Global Selling: Your passport to easy exports and shipping from India

Amazon Global Selling enables Indian exporters to register and sell their ‘Made in India’ products on 18+ international marketplaces across the world including Amazon USA, UK, Singapore, UAE, and more. It also provides support from experts at every stage of the export process including logistics and packaging through Fulfillment by Amazon (FBA). With free webinars and city-wise events for exporters, documentation support and more, Amazon simplifies exporting from India.

Frequently Asked Questions

What is an unconfirmed LC?

An unconfirmed LC is a payment guarantee issued by the importer’s bank without the involvement of a confirming bank. It relies solely on the creditworthiness of the issuing bank.

Is an unconfirmed LC safe?

While an unconfirmed LC provides some level of security, it carries a higher risk compared to a confirmed LC. The exporter relies on the issuing bank’s creditworthiness, making it less secure than a confirmed LC.

What is the risk of an unconfirmed LC?

The risk of an unconfirmed LC lies in the potential non-payment or non-performance by the issuing bank.

What is the difference between a confirmed and advised letter of credit?

In a confirmed LC, a confirming bank provides an additional payment guarantee to the exporter, enhancing security. An advised LC simply involves the advising bank notifying the exporter about the LC, without assuming any payment obligations.

What is the difference between a confirmed LC and a standby LC?

A confirmed LC is a payment guarantee that assures the exporter of payment upon meeting specified conditions. A standby LC acts as a backup to support the importer’s payment obligations in case of default.

Published on September 25, 2023.

Sources:
Sources:
1. https://www.investopedia.com/terms/c/confirmed-letter-credit.asp#toc-advantages-of-confirmed-letters-of-credit
2. https://www.intltradefinance.com/what-is-confirmation-as-it-relates-to-confirmed-letters-of-credit/

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