Based on whether another bank guarantees payment, letters of credit can be divided into confirmed letters of credit and unconfirmed letters of credit.
(1) Confirmed L/C.
A confirmed L/C is a letter of credit issued by an issuing bank, where another bank guarantees to pay for documents that meet the terms of the L/C. The bank that confirms the L/C is called a confirming bank.
According to the provisions of UCP600, once a letter of credit is confirmed, it constitutes a definite commitment of the confirming bank outside the issuing bank. The confirming bank bears the same payment responsibility as the issuing bank. The confirming bank is independently responsible to the beneficiary as an independent “principal” and bears the primary payment responsibility to the beneficiary. After the confirming bank makes payment, it has no right of recourse against the beneficiary or other predecessors.
The “irrevocable” nature of a letter of credit refers to the issuing bank’s payment responsibility for the letter of credit. “Confirmation” refers to the payment responsibility of a bank other than the issuing bank for the letter of credit. An irrevocable confirmed letter of credit means that the letter of credit not only has an irrevocable payment guarantee from the issuing bank, but also a payment guarantee from the confirming bank. Both payees bear primary payment liability. Therefore, this double-guaranteed letter of credit is most beneficial to exporters. The payment liability of the confirming bank is subject to the condition that the specified documents are submitted to the confirming bank on or before the due date and comply with the terms of the letter of credit. The confirming bank is usually the notifying bank, and sometimes it can also be other banks in the export destination or banks in a third country (region). The confirmation procedure is generally for the confirming bank to add confirmation text to the letter of credit.
(2) Unconfirmed letter of credit (Unconfirmed L/C).
An unconfirmed letter of credit means a letter of credit issued by an issuing bank that has not been confirmed by another bank. This type of unconfirmed letter of credit is generally used when the issuing bank has good credit and the transaction amount is not large.