Payment & trade finance

Confirmed letter of credit

A letter of credit to which a second bank, usually in the seller’s country (the confirming bank), adds its own payment undertaking on top of the issuing bank’s. It protects the seller when the issuing bank’s credit risk or the buyer country’s transfer and country risk is high. The confirmation fee is usually an annual percentage reflecting the risk, and the contract should say who pays it.

Related terms

Letter of credit (L/C) L/C

A documentary payment method in which the buyer’s bank (issuing bank) undertakes to pay the seller against timely presentation of complying documents specified in the credit – bill of lading, invoice, certificate of analysis, certificate of origin and so on. Banks deal only with documents, not goods, so the credit terms must match the sales contract exactly and be achievable. It is the most common secure payment method for large raw material deals and first-time counterparties.

Country risk and transfer risk

The risk that money cannot reach the seller because of economic or political events in the buyer’s country – foreign-currency shortages, capital controls, sanctions, war or a moratorium – even when the buyer is willing and able to pay. OECD country risk classifications and sovereign credit ratings are used to gauge it. Sales to high-risk countries call for confirmed letters of credit, export credit insurance and payment in a strong currency.

Explained in the trade handbook

Trade handbook