A letter of credit and a confirmed letter of credit are documents that are used in international transactions. A letter of credit is issued by the bank of the purchasing company to guarantee to the selling company that the buying company has the money available to transfer to the seller once the purchased goods are received. A confirmed letter of credit is equivalent to a second opinion. Some sellers require a confirmed letter of credit from a second institution to guarantee that the money is available.

The seller of the goods typically has its own bank that is involved in the transaction. The original letter of credit from the issuing bank is sent to the bank that is representing the seller. The two banks work together to foster the transaction between the buyer and the seller in the international transaction. Both banks stay involved throughout the transaction. The involvement of both banks include the original letter of credit and the second letter or credit, which is the confirmed letter of credit.

Essentially, a confirmed letter of credit involves two banking or financial institutions that hold money for the business that is purchasing the goods. This is a double guarantee that if in fact one of the banks cannot cover the cost of the goods, the second institution will hold enough money to cover the amount of goods that the purchaser is buying.

A letter of credit is typically required by the seller of the goods to guarantee that they will receive the money that is due to them once they ship the goods. A letter of credit also protects the buyer because they do not have to pre-pay for the goods until the buyer receives confirmation that the goods have actually been shipped. The confirmed letter of credit is simply added insurance for both parties that the goods will be paid for and received according to the agreement between the buyer and the seller.

A confirmed letter of credit is not only double insurance, but may be a necessity for certain countries. Countries that are experiencing political or economic instability may require that a confirmed letter of credit be involved in each of its international deals, rather than just relying on the original letter of credit.

Once the letter of credit and confirmed letter of credit are received, the seller typically ships the goods. Once the purchaser’s bank receives confirmation that the goods have been shipped, then the funds are released according to the terms and conditions set in the letter of credit and the supporting confirmed letter of credit.