How Does LC Confirmation Works?

 Letters of credit are financial instruments that are most commonly used in international trade by exporters and importers. Trading in the international markets is generally very lucrative but it could also be very risky. The trading of goods in international markets depends on a constant supply of money. And most exporters get this supply of money from the payment from the previous shipment. Hence, if the buyer defaults before making the payment then the exporter will not receive any money and this might result in halting the entire shipment process. And a letter of credit comes to the rescue in situations like this. In a letter of credit, a financial institution like a bank makes the payment in case the buyer defaults. 

 

However, in some rare cases, the financial institution could also fail to make the payment in time, and if such a thing happens then it would also halt the entire shipment process. To avoid such a thing, you should go for an LC confirmation. 

 

How a letter of credit confirmation works is pretty simple. In a confirmed letter of credit, a second financial institution agrees to make the payment in case the first financial institution fails to make the payment in time. 

 

If you are not satisfied with the creditworthiness of the first letter of credit then you can also opt for LC confirmation. Going for a letter of credit confirmation reduces the risk significantly. The confirmed letter of credit gives the exporters an assurance that they will receive the payment after the goods are transported to the buyer. Besides this, the buyers can rest assured that they will receive the requested goods from the seller when they obtain a confirmed letter of credit. 

 

For this reason, the confirmed letter of credit has advantages for both the exporter and the buyer by protecting both their interests.