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.
References
- Business Dictionary: Silent Confirmation
- Business Dictionary: Letter of Credit
- Investopedia: Letter of Credit
- Expert Law: The Letter of Credit
- International Trade Administration. "Trade Finance Guide," Pages 7–8. Accessed April 15, 2020.
- Export-Import Bank of the United States. "How Does a Letter of Credit Work and What Is It?" Accessed April 15, 2020.
- International Trade Administration. "Trade Finance Guide," Page 8. Accessed April 15, 2020.
- International Trade Administration. "Trade Finance Guide," Page 7. Accessed April 15, 2020.
- Scotiabank. "Documentary Letters of Credit: A Practical Guide," Page 10. Accessed April 15, 2020.
- Columbia Bank. "Letters of Credit." Accessed April 15, 2020.
- Scotiabank. "Documentary Letters of Credit a Practical Guide," Page 17. Accessed April 15, 2020.
- American Express Company. "What Is the U.S. Export-Import Bank?" Accessed April 15, 2020.
- Export-Import Bank of the United States. "An Experienced Freight Forwarder Is Your Friend in Exporting." Accessed April 15, 2020.
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Jennifer VanBaren started her professional online writing career in 2010. She taught college-level accounting, math and business classes for five years. Her writing highlights include publishing articles about music, business, gardening and home organization. She holds a Bachelor of Science in accounting and finance from St. Joseph's College in Rensselaer, Ind.