Export Trade Finance - L/C Confimaton

Confirmed L/C / L/C Confirmation is that another bank (not issuing bank) independently take the responsibility of payment for the exporter/beneficiary.

L/C Confirmation is also a financing service provided by the bank for the exporters. However, L/C Confirmation is not like other financing services (eg. discount or negotiation) transferring the money physically into the exporter's account but a promise of payment in future. Thus, in the exporter's view, It's really hard to understand why it belongs to a financing service. However, From the bank's view, Confirmation has a financing functionality. Bank has to prepare the money to give exporters. So this money is a kind of account payable / paid.

Characters of L/C Confirmation

• The beneficiary can avoid all risk from issuing bank/issuing bank country.
• The beneficiary has a double guarantee now from 2 banks.
• Exporters normally will add confirmation after receiving the L/C from the foreign issuing bank. 
• No limit to the money used. 
• Financing period is short ( < 180 days)
• Only local negotiation bank or bank related to the L/C can do the confirmation service otherwise it's hard for other banks to tell the veracity of documents.
• Confirming bank has no recourse to the beneficiary. 

Type of Confirmation

There're 2 types of confirmation service provided by the bank.

1. Open Confirmation: Issuing bank invites a bank in the exporter's country openly to add a confirmation to the L/C it provides to be the first responsible to pay. Normally, In the L/C, It will indicate in words "Please Add Confirmation".

2. Silent Confirmation: No invite from issuing bank, the local bank directly add confirmation to the L/C as the exporter's request. In this case, the local bank takes a higher risk from issuing bank/ issuing bank country. Under Export L/ C, Silent confirmation can also be categorized into 2 types based on the risk level (Absolute/Relative). And 2 types based on whether to give financing to the beneficiary (Funded/Unfunded).

• Absolute Silent Confirmation: The local bank will buy in issuing bank's country risk and documentary risk. So the confirming bank will bear all risk once receiving the documents from the beneficiary including rejection to pay from issuing bank.
• Relative Silent Confirmation: The local bank will buy in issuing bank's country risk but not the documentary risk. So the confirming bank will take all the risks, not including the rejection to pay from issuing bank due to the discrepancy of documents provided.

• UnFunded Silent Confirmation: Confirming bank will pay, but only pay on the exact date that it promises to pay to the exporter. never pay in advance. 
• Funded Silent Confirmation: As beneficiary's request, Confirming bank will pay once the beneficiary submits related documents.

In the real world, the silent confirmation is more commonly accepted by exporters. So here I will take silent confirmation as an example to explain further. 

Business Flows

1. The exporter received the L/C from the foreign bank and submit an application (application form) to the local bank to do the silent confirmation.  
2. The local bank accepts the application and signs a contract with the exporter if documents match. if documents mismatch, the bank will terminate the contract and sign termination contract. 
3. The foreign bank (issuing bank) transfers money to the local bank along the time. 
4. The local bank once receiving the money will auto-deduct the interests and fees and transfer the remainings into exporter's firm account. 

Difference between confirmation and forfeiting 

Similarity :

1. No recourse for both 
2. No limitation for Financing purpose of beneficiaries
3. No credit line occupied for both 
4. Both mostly depends on L/C

Difference:

1. Financing time is different. Silent confirmation's financing time is after exporter's submitting docs. Forfeiting's financing time is after getting the promise of payment from the foreign bank.
2. Financing time range is different. confirmation is < 1 year. forfeiting can reach up to 10 years. 
3. Money arrival time is different. forfeiting will get the money immediately. confirmation mostly will wait for half a month. 
4. Interest and fee are different. Silent confirmation's fee and interest <forfeiting's. 
5. Whether can be selldown is different. Silent confirmation normally can't be selldown. forfeiting can be involved in risk participation and selldown the risk. 
6. Whether can be Tax refund is different. Silent confirmation has no tax refund. forfeiting has.