Exporters generally understand the protection they receive with a confirmed letter of credit. They know the confirming bank obligates itself to pay even if unable to collect from the issuing bank.
However, some exporters do not fully understand how to effectively ask for a confirmed letter of credit. Let's begin by emphasizing one very important principle and then provide a right way and a wrong way to ask for a confirmed letter of credit.
Getting a Confirmed Letter of Credit
An astute exporter understands the need to be proactive when dealing with letters of credit of any kind. Stressed in a number of the lessons in this series of articles, this strategy holds true for obtaining a confirmed letter of credit as well.
A second bank will consider confirmation of a foreign bank's letter of credit only if asked by the foreign bank. A bank will not confirm a letter based only on the request of the exporter. In order for the confirming bank to have any recourse to the issuing bank, the issuing bank must request another bank to add its confirmation.
It follows that a foreign bank will only request the confirmation if asked to do so by their customer, the buyer. It further follows that the buyer has no motive to ask the issuing bank to request the confirmation unless the seller insists that the buyer do so; hence the need for the exporter to be proactive. Either party can offer to pay the fee for the confirmation.
Now, let's consider the wrong and the right way to ask for a confirmation. The wrong way is to instruct the buyer to send a confirmed letter of credit. An exporter recently did just that.
They received a hard copy of a letter of credit issued by a bank in the Philippines, very prominently entitled, "Confirmed Letter of Credit." The advising bank gave no indication that they had confirmed the letter of credit because the issuing bank did not ask them to confirm it.
What did the exporter really have? Can a bank confirm their own letter of credit?
No! It serves no purpose for a bank to confirm their own credit. It does not protect the exporter against the risk of default due to sovereign risk or the risk of the issuing bank not having the resources to pay. (Read the article, International Trade Risk: Assessing Banks and Bank Risk.)
For an exporter to gain full benefit with a confirmed letter of credit it must carry the confirmation of a second bank in a second country.
To ask for a confirmed letter of credit, use the following wording: "The letter of credit is to be confirmed by (name of your favorite bank)," and fill in the blank. You may indicate you want the letter of credit confirmed "by a bank acceptable to us," or you may insert the name of a bank.
If you use a bank's name, contact them first to verify they will confirm the credit. They will want to know five factors: (a) the country; (b) the name of the issuing bank; (c) the dollar amount; (d) the tenor, e.g., sight, 30 days sight, etc. and (e) the expiration date. At that time the bank can also give you a quote for the price of confirming the letter of credit so you can build it into the price of your product.