A letter of credit, issued by a bank and obtained by a buyer, states that the bank will back up the payment if the buyer fails to do so. Formal and silent confirmation letters are types of letters of credit.
Confirmed Letter
A confirmed letter of credit is one issued by a foreign bank but guaranteed by a domestic bank. This letter guarantees the seller that if the buyer and the domestic bank default, the foreign bank will cover the payment.
Formal Letter
A formal confirmation letter of credit is the same as a confirmed letter of credit. The seller holds very little risk in making a sale to a customer who has obtained a formal confirmation letter. The only way the seller will not get paid is if the buyer, domestic bank and foreign bank all default on the payment.
Silent Letter
A silent letter of confirmation is similar to a formal letter of credit. It also has the protection of a foreign bank backing up a domestic bank, but the domestic bank has the opportunity to negotiate terms and prices with the seller.
