What Is a Confirmed Documentary Credit and How It Works

A confirmed documentary credit is a type of payment guarantee that provides assurance to the beneficiary that they will receive payment for a shipment. It's like a promise from the issuing bank that the payment will be made.

The issuing bank confirms the credit with the beneficiary, which means they verify that the credit is valid and will be honored. This confirmation is usually done in writing.

The beneficiary can then rely on the confirmed documentary credit to ensure payment for their shipment. It's a reliable way to get paid for goods or services.

A documentary credit is a type of payment guarantee that protects both buyers and sellers in international trade transactions. It's essentially a promise by a bank to pay a certain amount of money to a seller if the buyer fails to make a payment.

This guarantee is usually issued by a bank at the request of a buyer and is used to secure a payment for goods or services. The documentary credit specifies the terms and conditions of the payment, including the amount, currency, and payment method.

In a documentary credit, the seller must provide the buyer's bank with the required documents, such as a commercial invoice and a bill of lading, before the payment is made.

Silent Confirmation is a private arrangement between a bank and the beneficiary where the advising bank adds a conditional guarantee of payment without the knowledge of the issuing bank. This arrangement is more costly due to the higher risk involved.

The main reasons for this higher cost are that Silent Confirmation is not covered by UCP, and no confirmation request is in place from the issuing bank. This means the usual responsibility of an issuing bank towards a confirming bank does not exist.

A key aspect of Silent Confirmation is that it arises when an issuing bank sees no reason to add a confirmation to their credit, deeming it creditworthy enough. This is a significant consideration for banks and beneficiaries alike.

Here are the key differences between Silent Confirmation and regular confirmation:

These factors contribute to the higher cost and risk associated with Silent Confirmation.

A documentary credit is a type of payment system that ensures the buyer and seller are protected when making a transaction. It's a way to guarantee payment for goods or services.

In a documentary credit, the buyer asks their bank to issue a letter of credit, which is sent to the seller's bank. The seller can then request that their bank confirm the letter of credit, essentially saying they'll guarantee payment to the seller.

The process of confirming a letter of credit can add an extra layer of security for the seller, as they now have two banks on the hook to pay them. This can be a significant advantage, especially when dealing with unfamiliar buyers.

The confirming bank will check that all the documents are in order before paying the seller, and then send the documents to the issuing bank. The issuing bank will then pay back the confirming bank.

A confirmed documentary credit is a guarantee from a bank that it will pay the seller if the first bank fails to do so, decreasing the risk of default for the seller.

This type of credit is most often used in international trade and business transactions where a lot of money is at stake.

Only irrevocable letters of credit can be confirmed.

A confirmed documentary credit is a guarantee from a bank that it will make good on a buyer's financial obligations to a seller in a transaction, providing a secure and reliable payment process.

To confirm a letter of credit, the issuing bank must "authorize or request" the potential confirming bank to add its confirmation to the letter of credit.

Here are the key points to consider when working with a confirmed documentary credit:

A confirmed documentary credit is a guarantee from a bank that a payment will be made on time and for the full amount. This type of credit is typically used in international trade and business transactions.

The process of securing a confirmed documentary credit is similar to securing a regular letter of credit. The buyer must find a second bank to back its purchase in case of default. This second bank promises to pay the seller the amount agreed upon if the first bank fails to do so.

The structuring of the funds for the second letter of credit generally takes the terms of the first letter of credit into consideration. In some cases, the seller may only require the second letter of credit to represent a percentage of the total due.

Banks may charge the buyer a fee when they issue a confirmed letter of credit. The amount of the fee can depend on the size of the transaction and payment amount, as well as the relationship between the buyer and the bank.

Here are some common scenarios where a confirmed documentary credit is used:

A confirmed documentary credit can provide a sense of security for the beneficiary, eliminating two main risk factors: country risk and the insolvency risk of the issuing bank.

This is a significant benefit, as it allows the beneficiary to feel more confident in receiving payment.

The confirmation process can be seen as a security mechanism that works in favor of the beneficiary.

Confirmed letters of credit may add costs to the trade deal, with the confirming bank's fee cutting into the seller's profits.

The fee for a confirmed letter of credit is usually a percentage of the amount being paid in the deal, and the riskier the confirming bank thinks the deal is, the higher the fee will be.

Confirming banks charge a fee for taking on extra risk, and this fee is usually paid by the seller, who values the added security and peace of mind.

The confirming bank has to review all the documents and make sure everything is in order before they'll pay, which can slow down the deal.

It can get complicated figuring out who's responsible if something goes wrong, with the seller, the buyer, the issuing bank, and the confirming bank all potentially tangled up in a dispute.

Here are some of the downsides of confirmed letters of credit:

The benefits of a confirmed letter of credit are numerous. Confirmation can be seen as a security mechanism, which works in favor of the beneficiary to eliminate the two risk factors of country risk and the insolvency risk of the issuing bank.

By confirming a letter of credit, beneficiaries can rest assured that their payments will be secure. Confirmation eliminates the country risk and the insolvency risk of the issuing bank, giving beneficiaries peace of mind.

The confirming bank is betting on the financial stability of the issuing bank and the country it's in. If something goes wrong and the issuing bank can't pay, the confirming bank has to pay the seller out of their own pocket.

The risk of the issuing bank not paying up is a major concern for confirming banks. They need to have a credit facility established with the issuing bank to even consider adding confirmation.

According to UCP 600 article 2, a confirming bank is defined as the bank that adds its confirmation to a documentary credit upon the issuing bank's authorization or request. This means they're making a definite undertaking to honour or negotiate a complying presentation.

The confirming bank also accepts the documentary risk in the examination of documents. If they determine that the documents comply, they must honour or negotiate, even if the issuing bank later says the documents don't represent a complying presentation.

A confirming bank need not be a nominated bank, but it's highly advisable that it is. If it's not a nominated bank, the bank must understand what form its undertaking is to take, whether it's a reimbursement undertaking or acting as a security for non-payment by the issuing bank.

A revolving account is a type of account that allows a buyer to make multiple purchases from a seller over a period of time, rather than just a single transaction. This is similar to a revolving letter of credit, which covers a series of transactions between a buyer and seller.

A revolving account is often used for ongoing business relationships, where a buyer needs to purchase goods or services from a seller regularly. This type of account can be beneficial for both parties, as it simplifies the payment process and allows for easier tracking of transactions.

Confirmed documentary credits have numerous real-world applications. One of the most significant uses is in international trade, where they provide a secure way for buyers and sellers to conduct business across borders.

They help mitigate the risks associated with payment, such as non-payment or delayed payment, by ensuring that the buyer's payment is made in accordance with the terms of the credit.

In the case of a letter of credit, a confirmed documentary credit can be issued by a bank in the buyer's country, which guarantees payment to the seller upon presentation of compliant documents.

This can be a game-changer for small businesses or those new to international trade, as it provides a level of security and predictability that may not be available through other payment methods.

A confirmed documentary credit can be issued for a variety of transactions, including the purchase of goods, services, or even project financing.