What is a Confirmed Letter of Credit?
The confirmed letter of credit guarantees that the seller will receive the payment even if the buyer or the buyer’s bank fails to pay. This letter is commonly referred to as an LC, and the seller’s bank generally issues this letter. In other words, an LC is a guaranteed payment as long as the buyer meets all the requirements.
Significance of Confirmed Letter of Credit in an E-commerce Shipping and Delivery
A confirmed letter of credit allows a buyer to deal with customers that refuse to pay after certain conditions have been fulfilled. Furthermore, merchants can also use it to prove the solvency of a business.
- Reducing the risk of non-payment: As long as the seller fulfills their end of the contract, the LC ensures their payment. It allows a buyer to overcome internet fraud and even reduce the risk of getting their payment withheld by a customer.
- Proof of solvency: An LC is only issued to a merchant with credible records. Therefore, when purchasing inventory or machinery, a brand can use LC to prove its solvency and take up loans.
Prerequisites of Confirmed Letter of Credit and How It Works
A buyer must submit several approvable documents to acquire the confirmed letter of credit. The papers are listed below.
- Required bills: Airway bill/freight bill, Bill of lading
- Inspection certificate
- Commercial invoice
- Origin certificate and insurance certificate
- Packing list
Once all the mentioned documents are sent and approved by the sellers’ bank, the confirmed letter of credit is issued.
If a customer withholds the payment after product delivery, the seller can take this up with their bank.
Use Case with Confirmed Letter of Credit
For example, a bank issued a confirmed letter of credit to seller A, who was supposed to ship the product to buyer B. When the product was dispatched, the seller received all the documents from his bank, which the seller’s bank forwarded. After the product is delivered, the buyer’s bank makes the payment.