What are the differences between confirmed and unconfirmed letters of credit?

Letter of credit is an irrevocable undertaking of the issuing bank to honour a complying presentation.

The beneficiary of the letter of credit must be ascertain that she/he will get the payment from the issuing bank as long as she/he comply with the terms of the credit.

From the beneficiary's perspective, complying presentation must be equal to payment, without any excuses. But in reality, sometimes things work differently.

There are many risks in letters of credit, and significant amount of them stem from the issuing bank or the country of its residence.

As a result, in some situations the beneficiary may not be %100 sure that the issuing bank will make the payment under complying presentations.

What are the differences between confirmed and unconfirmed letters of credit?

For those instances, the beneficiary may seek another bank's payment undertaking added to the letter of credit, in addition to that of the issuing bank's.

The process is known as confirmation and the bank adding its confirmation to the credit is called as confirming bank.

If a letter of credit possesses a confirming bank's confirmation, then the credit becomes a confirmed letter of credit.

If a letter of credit reaches to the beneficiary with only issuing bank's payment undertaking, without confirmation added by another bank, then the credit becomes an unconfirmed letter of credit.

In today's post, you can find the main differences between a confirmed letter of credit and an unconfirmed letter of credit.

What is Confirmation? What are the Advantages of a Confirmed Letter of Credit?

Letter of credit is a payment method in international trade. I have been writing articles covering a variety of topics of letters of credit.

So far, I have defined what letter of credit is and explained its types, parties involved in and their roles and responsibilities, transaction steps and risks associated with different involving parties.

Additionally, you can find detailed information regarding issuing bank, confirming bank, nominated bank and advising bank on my previous posts.

Today, I explain the concept of confirmation as well as its main advantages to exporters.

What are the Differences Between Confirming Bank and Nominated Bank?

In theory, it is possible that a nominated bank and a confirming bank are present as two separate banks in a letter of credit transaction.

But in reality it occurs very seldom, mainly because of the fact that confirming banks do not add their confirmations to letters of credit, which are not available by themselves.

The roles and responsibilities of the nominated bank and the confirming bank are significantly different. For this reason, exporters and importers need to understand the key distinctions between these two banks.

On this post, you can find not only the definition of a nominated bank and a confirming bank according to letter of credit rules, but also how they differ from each other.

What are the Differences Between Advising Bank and Nominated Bank?

In most cases, the advising bank and the nominated bank is the same institution in a typical letter of credit transaction.

Only in rare occasions, these two banks are apart from each other.

Because, there are significant differences exist between the advising bank and the nominated bank, each side of the transaction, both exporters and importers, should understand the roles and responsibilities of these two banks very well.

On this post, you can find not only the definition of advising bank and nominated bank according to letter of credit rules, but also the main differences between these two banks.

Differences Between Advising Bank and Nominated Bank

Nominated Bank

On this article you can find the definition of a nominated bank, its roles and responsibilities in a typical letter of credit transaction.

Definition: According to current letter of credit rules, UCP 600, nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

Nominated bank has two main functions under a letter of credit transaction.

Firstly, a nominated bank is the presentation point of the documents. As a result, a beneficiary complete its presentation by submitting documents to the counter's of the nominated bank within the time frame indicated in the letter of credit.

Secondly, a nominated bank may act as a discounting bank by purchasing a time draft or documents that have been submitted by the beneficiary and found to be complying by the nominated bank.

Nominated Bank

After briefly defining what nominated bank is and explaining its functions, now we can look further into different aspects of nominated bank.

Confirming Bank

On this article you can find the definition of a confirming bank, its roles and responsibilities in a typical letter of credit transaction.

Confirming bank means the bank that adds its confirmation to a letter of credit upon the issuing bank's authorization or request.

In some situations, issuing banks' payment undertakings would not be sufficient for beneficiaries. This is especially true, when letters of credit are opened from one of the high political and financial risk possessing countries.

If the beneficiary figured it out that the issuing bank or issuing bank's country is not reliable enough, then the beneficiary may seek another bank's payment guarantee added to the letter of credit in addition to issuing bank's payment undertaking.

Confirming Bank

The process as explained above is called confirmation and the bank which adds its confirmation to the letter of credit is known as the confirming bank.

What are the Differences Between Advising Bank and Issuing Bank?

On this article you can find not only the definition of an advising bank and an issuing bank, but also their differences in a typical letter of credit transaction.

Letter of credit is an international payment method. 

It is significantly different than other payment options in international trade, mainly because of the fact that letter of credit is governed by banks.

As a result it is a vital importance to understand banks, their roles and responsibilities in order to act correctly under a letter of credit transaction.

Advising Bank is the bank that advises the letter of credit to the beneficiary. 

Issuing bank, on the other hand, is the bank that issues a letter of credit at the request of an applicant or on its own behalf.

After making the definitions, we can now proceed to understand the key differences between advising banks and issuing banks.

Issuing Bank

On this article you can find the definition of an issuing bank, its roles and responsibilities in a typical letter of credit transaction.

Letters of credit transactions are started and ended by issuing banks.

An issuing bank negotiates with the applicant to draft the letter of credit, determines the conditions for payment, issues it in swift format and transmits it to the advising bank.

Advising bank, confirming bank, nominated bank are all selected by the issuing bank, as well. Additionally, payment or refusal decision is given by the issuing bank, at the end of the transaction.

Issuing bank sits on the core of letters of credit and today, we are going to understand, why.

Let me start my article with the definition of the letter of credit:

Issuing Bank

According to letter of credit rules, letter of credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

The same rules define issuing bank is the bank that issues a letter of credit at the request of an applicant or on its own behalf.

Advising Bank

On this article you can find the definition of an advising bank, its roles and responsibilities in a typical letter of credit transaction.

Advising Bank is the bank that advises the letter of credit to the beneficiary. Advising banks act upon the request of issuing banks.

Generally, advising banks are located in the same country as beneficiaries. That is why issuing banks need their services.

Letters of credit are transmitted between banks via an online platform called Swift.

Swift platform is secure and fast, but it is expensive. That is why most of the exporters and importers do not have an access to the Swift platform.

In today's international trade world, letters of credit are transmitted from issuing bank to the advising bank via swift platform and afterwards advising banks advises the credits to the beneficiaries other means of telecommunication such as email attachments of .tif or .html files.

Important Note: You should keep in mind that swift is an authenticated teletransmission platform. A letter of credit or amendment transmitted via swift is deemed to be the operative, and any subsequent mail confirmation is not needed and shall be disregarded.

Letter of Credit Basics: Risks in Letters of Credit

Each international trade transaction carries a risk, lower or higher.

Some trade relationships might have been established for a long period of time between importers and exporters, whom are located in safe countries with sound financial backgrounds.

In such a scenario, we can talk about two professional partners, working for a win-win situation, both of them understanding its roles and responsibilities in order to complete the transaction in a good manner.

Concluding these kinds of transactions financially would not be a difficult task.

Now, I want you to think just an opposite scenario. Potential trade is about to initiate between an importer and exporter, whom has no enough knowledge about the counter party. Even more, at least one party is located in a politically unstable country.

What do  you think. Which payment method should be chosen to satisfy both parties under such extreme conditions?

Do you think that you can find a risk free payment method that you can rely on regardless of the surrounding conditions?

Above, I have tried to illustrate two different conditions effecting the payment selection decisions in international trade.

On this post, I will try to explain the risks associated with international payment methods in general.

Specifically, I will emphasize the risks in letters of credit for different parties perspectives.

Letter of Credit Basics: L/C Transaction

How does a letter of credit work? How to use a letter of credit in import and export businesses?

So far, I have published two articles under "Letter of Credit Basics" series at advancedontrade.com. 

First article was published with the following title: "Letter of Credit Basics: Definition and Types". Second article's title was "Letter of Credit Basics: Parties to Letters of Credit".

This is the 3rd article of "Letter of Credit Basics" series and it will be focused on letter of credit transaction process.

With the help of an illustration and detailed explanations, letter of credit transaction will be covered from beginning to end.

After reading this article, you should be able to answer questions such as:

• Who is initiating the letter of credit issuance process? Importer or exporter?
• Which party advices the credit to the exporter?
• Which party / parties must pay letter of credit amount to the beneficiary against a complying presentation?

Letter of Credit Basics: Parties to Letters of Credit

Letter of credit is a payment method in international trade. It is usually shortened as L/C or DLC. DLC means Documentary Letter of Credit or Documentary Credit. 

As of yesterday, I have started to write down a new series of articles regarding letters of credit. The 1st article was about the definition and types of letters of credit.  

Today, on this article, I will try to introduce you the parties to a simple letter of credit transaction. Each L/C party will be presented briefly and its role will be explained with the help of the graphic images. 

In a typical letter of credit transaction, one should expect to see following parties: applicant, beneficiary, issuing bank, confirming bank, nominated bank and reimbursing bank.

Let us start understanding these parties along with their roles and responsibilities one by one below.

Letter of Credit Basics: Definition and Types

Letter of credit is a payment method used in international trade transactions.

The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules.

Due to this complex structure, many international trade personnel have facing difficulties in letter of credit transactions.

Starting with today's post, I will be writing articles regarding different aspects of letters of credit. Hoping that my posts will be helping you out in your daily work.

The first article not only explains letter of credit definition but also defines letters of credit types.

What is an Inspection Certificate or Certificate of Inspection?

Required usually for import of consumer goods such as softlines, hardlines, electronic goods, luxury goods; commodities such as bulk oil shipments and bulk scraps shipments, inspection certificate is one of the most important trade documents.

Inspection certificate, sometimes called as certificate of inspection or pre-shipment inspection certificate, is a trade document used in international trade transactions, issued generally by an independent inspection company after conducting a related inspection, certifying whether or not the goods are in question are in conformity with the specifications stated on the sales contract.

On this page I would like to explain inspection certificate in detail.

Some of the subject that will be covered on this article are as follows:

• What is the function of an inspection certificate in export and import businesses?
• What are the types of inspection certificates?
• Are all inspection certificates are the same?
• Who should issue and sign the inspection certificate?
• When should the inspection certificate be issued?
• What are the benefits of an inspection certificate?

Who can sign a charter party bill of lading as per UCP 600?

Letter of credit rules give special attention to transport documents.

If you read the latest version of letter of credit rules, UCP 600, you will realize that all transport documents have been specified in very detail.

UCP 600 rules define by whom each transport document must be signed in order be acceptable under letter of credit transactions.

For example UCP 600 article 20 states that a bill of lading, however named, must appear to indicate the name of the carrier and be signed by the carrier or a named agent for or on behalf of the carrier, or the master or a named agent for or on behalf of the master.

Today I would like to explain by whom a charter party bill of lading should be signed as per UCP 600?

Is it possible to submit a charter party bill of lading instead of a marine bill of lading under a letter of credit payment?

Letter of credit rules define different types of bills of lading.

Multimodal bill of lading, marine bill of lading, non-negotiable bill of lading and charter party bill of lading are different types of bills of lading, which have been defined by UCP 600.

Please keep in mind that UCP 600 is the latest and current version of L/C rules.

Exporters and importers as well as bank personnel should understand the details of letter of credit rules very well, otherwise they make costly mistakes.

Today I would like to explain whether a charter party bill of lading can be presented instead of a marine bill of lading under letter of credit transactions.

How to complete airport of destination field according to L/C rules?

Air waybill is a transport document, which is issued in international air cargo shipments, verifies not only receipt of cargo by the carrier but also evidences contract of carriage as well.

Air waybill is not a negotiable document, which is a non-negotiable document, as a result it does not represent title of the goods.

Consignee can collect the goods from the carrier by identity approval without the need of surrendering at least one original copy of the air waybill at the airport of destination.

 

Airport of destination is one of the key fields of an air waybill, along with airport of departure, as these are the first two points that banks control during document checks under letter of credit transactions.

Today I would like to explain you how to complete the airport of destination field correctly according to letter of credit rules.

How to complete airport of departure field according to L/C rules?

Today I would like to explain you how to complete the airport of departure field correctly according to letter of credit rules.

Air waybill is a transport document that is used in air shipments, which will be requested by issuing banks under letter of credit transactions.

Airport of departure is one of the key elements of an air waybill and it needs to be completed carefully when dealing with a letter of credit, because banks find discrepancies on the transport documents more frequently than any other shipping documents under letter of credit presentations.

If you need more fundamental information in regards to airport of departure and how it functions on an air waybill, please have a look at my previous article "What does airport of departure and airport of destination mean on an air waybill?"

How to complete consignee and notify fields on an air waybill?

Air waybill is a non-negotiable transport document, which is issued by the air cargo carrier or its agent on behalf of the carrier, used in international air shipments.

Just like other non-negotiable transport documents, air waybills cannot be issued "to order" or "to order of a named company (such as banks)".

As a result air waybills must be issued straight, in other words, consigned to a named company.

Today I would like to explain consignee and notify fields of the air waybill and how to complete them correctly.

What does "Franchise" and "Excess" mean on an insurance policy?

Sometimes insurance companies, insurers, would like to limit their risk exposures, especially when certain damage of the goods is an ordinary expectation throughout the related sector.

In such circumstances insurance companies add technical insurance terms,"Franchise" and "Excess", to the insurance policies, in order to limit their financial responsibilities.

On this article I will try to explain the meanings of "Franchise" and "Excess". 

What does "Franchise" mean on a cargo insurance policy? What does "Excess" mean on a cargo insurance policy.