Confirmed Letter of Credit vs Unconfirmed: Definitions, Risks, Costs, and When to Use Each

Why This Distinction Matters

Letters of credit (LCs) are still the backbone of cross‑border trade when counterparties don’t know each other well—or when country risk, bank risk, or payment timing can’t be left to chance. The choice between a confirmed letter of credit and an unconfirmed letter of credit is not cosmetic. It changes who holds default risk, how much you pay in bank fees, and how fast you can ship, get paid, and move on to the next cycle.

Exporters often ask for confirmation because they do not want to rely on a distant issuing bank in a volatile jurisdiction. Importers push back because confirmation adds basis points and sometimes days to the timetable. Both sides are right to question the trade‑off. This article breaks the decision down in plain terms so you can match structure to risk—not habit.

You will find side‑by‑side comparisons, fee mechanics, an outline of the UCP 600 rules that govern both instruments, and practical scenarios drawn from real transactions. The final section is a direct pitch: if you need a bank to confirm your LC—or to structure the entire arrangement under FEMA and RBI norms—we do this every day. Talk to us when you’re ready.

Quick Definitions

Unconfirmed Letter of Credit: A documentary credit issued by an issuing bank (usually in the buyer’s country) and advised to the seller by an advising bank, with no added payment undertaking from the advising bank. The seller relies solely on the issuing bank’s promise—subject to UCP 600 and the LC terms.

Confirmed Letter of Credit: The advising bank (or another nominated bank) adds its own independent, irrevocable payment undertaking on top of the issuing bank’s obligation. Two banks now owe you money if documents comply: the foreign issuing bank and the confirming bank, which is typically in your home market or a stronger jurisdiction.

Headline Differences at a Glance

Aspect	Unconfirmed LC	Confirmed LC
Who pays if the issuing bank defaults?	Exporter bears the risk; no second bank obligation	Confirming bank pays, regardless of issuing bank failure
Country & transfer risk mitigation	Limited—risk sits with issuing bank’s jurisdiction	High—risk shifted to confirming bank’s jurisdiction
Cost to applicant (importer)	Lower—standard issuance and advising fees	Higher—confirmation fee added (often passed to exporter)
Document examination timeline	Advising bank checks and forwards; no obligation to pay	Confirming bank must honor/ negotiate if docs comply
Comfort for exporter’s finance team	Moderate—depends on issuing bank ratings and country	High—local or top‑tier bank stands behind payment
Availability of discounting / post‑shipment finance	Possible, but pricing reflects issuing bank risk	Wider, cheaper options since confirming bank pays at sight/usance maturity
UCP 600 treatment	Covered; articles 7, 8, 9 define obligations	Also covered; article 8 spells out confirmation duties

The Risk Transfer Mechanics

With an unconfirmed LC, the exporter’s risk boils down to one question: “Will the issuing bank pay when it should?” Add sovereign and transfer risk on top—can that bank legally remit USD or EUR out of its country on time? If the answer is “not sure,” a confirmation makes sense.

Confirmation substitutes that uncertain counterparty with a bank you know, often in your own jurisdiction. The confirming bank takes on issuing bank risk, country risk, and sometimes document presentation risk. They price for it, of course, but they also streamline post‑shipment finance because their own name sits on the undertaking.

How UCP 600 Frames the Obligations

Both confirmed and unconfirmed LCs sit inside UCP 600(Uniform Customs and Practice for Documentary Credits), the ICC’s rulebook adopted by pretty much every bank that deals in trade finance. A few articles matter most here:

• Article 7 – Issuing Bank Undertaking: The issuing bank must honor if documents comply. That duty exists whether the LC is confirmed or not.
• Article 8 – Confirming Bank Undertaking: Once a bank confirms, it must honor or negotiate against compliant documents, independent of the issuing bank’s performance.
• Article 9 – Advising of Credits and Amendments: The advising bank has limited responsibility in an unconfirmed LC—mainly to check the apparent authenticity of the LC and pass it along unchanged.
• Article 14 – Standard for Examination of Documents: Banks have a maximum of five banking days to examine presented documents. That clock applies to both issuing and confirming banks.
• Article 16 – Discrepant Documents: Rules for refusal and notice—key in managing timelines when discrepancies pop up.

Exporters sometimes believe confirmation means “no discrepancies will ever be raised.” Not true. Confirmation doesn’t cure document mistakes; it just assures you that if the documents comply, payment is rock‑solid.

Cost Components: Where the Money Goes

Both structures carry standard LC costs—issuance, advising, negotiation, document checking. A confirmed LC adds a confirmation fee. That fee can be structured as a flat amount, a percentage per 90‑day period, or a spread over LIBOR/SOFR on a deferred payment basis. The party paying depends on negotiation; exporters often build it into the sale price or request reimbursement from the buyer.

• Issuance Fee: Charged by the issuing bank to the applicant (importer). Usually a percentage of face value, pro‑rated for LC tenor.
• Advising Fee: Payable to the advising (or confirming) bank for authenticating and forwarding the LC.
• Confirmation Fee: Risk‑based. Driven by country rating, issuing bank credit, tenor, and currency. Expect a sliding scale if the LC is extended or amended upward.
• Negotiation / Discount Fee: If you ask the confirming bank to pay at sight and they discount a usance LC, they’ll charge a discount margin.
• Discrepancy Fees: If documents are off, banks charge to process the discrepancy and re‑present.
• Amendment Fees: Each change to amount, expiry, or shipment terms triggers a ticket.

Do a simple TCO (total cost of ownership) analysis. If confirmation chops days off your DSO and cuts your cost of working capital by more than the confirmation fee, you’re in the money. If you’re shipping to a G7 bank with an A rating, maybe you save the fee and stick to an unconfirmed LC.

When Exporters Demand Confirmation

Patterns show up across markets:

• High political or transfer risk: Exporting to countries with FX shortages or capital controls makes confirmation attractive.
• Unknown or weak issuing bank: If the bank is unrated or has a thin balance sheet, exporters won’t sit on that risk.
• Longer tenors: A 180‑day usance LC amplifies counterparty risk; confirmation offloads it.
• Large ticket sizes: Boards and insurers often mandate confirmation beyond certain thresholds.
• Seasonal cash‑flow pressure: Discounting a confirmed LC can free up cash instantly.

Always check with your credit insurer too. Many policies require confirmation to turn an LC into an insurable event, or they heavily haircut coverage on unconfirmed paper from certain regions.

When Importers Push Back

Importers bear most issuance fees and get nervous about piling on confirmation cost. Common arguments:

• “Our bank is first‑tier; you don’t need confirmation.”
• “Country risk is low; we’re OECD. Save the margin.”
• “We can’t pass the fee through; margins are already tight.”

The middle ground: offer an unconfirmed LC but accept a price uplift if the exporter insists on confirmation. Or split the fee. Or have the exporter arrange confirmation and charge it back via discount terms. Everything is negotiable—just price the risk openly.

Operational Flow: Step by Step

A. Unconfirmed LC

1. Importer applies for LC with issuing bank.
2. Issuing bank issues LC and sends it to advising bank via SWIFT (MT700/710).
3. Advising bank authenticates and advises LC to exporter—no added undertaking.
4. Exporter ships goods, prepares documents per LC terms.
5. Exporter presents documents to nominated bank (often the advising bank).
6. Nominated bank checks documents; if clean, forwards to issuing bank for payment/acceptance.
7. Issuing bank honors if compliant; funds routed back through banking chain.

B. Confirmed LC

1. Importer applies for LC—may request that a specific bank add confirmation.
2. Issuing bank sends LC to the advising bank, asking if it will confirm.
3. Advising bank assesses risk, sets fee, and if agreed, adds confirmation; LC becomes available with it.
4. Exporter ships goods and presents documents to the confirming bank.
5. Confirming bank examines documents and, if compliant, pays/negotiates immediately (if sight) or commits to pay at maturity (if usance).
6. Confirming bank claims reimbursement from issuing bank under its undertaking.

Note the key shift: in the confirmed route, the exporter gets paid by a local or trusted bank. The issuing bank risk sits with the confirmer, not the exporter.

Discounting and Secondary Liquidity

Many exporters don’t want to sit on a 90‑ or 180‑day receivable. Discounting a confirmed LC is straightforward: the confirming bank or a third‑party fund buys the receivable at a margin over SOFR/EURIBOR, since payer risk is now a top‑tier bank. Unconfirmed LCs can be discounted too, but spreads widen with the perceived risk of the issuing bank and its jurisdiction.

Funds, insurers, and supply‑chain platforms like confirmed LCs because credit analysis is simple. You can even securitize streams of confirmed LC receivables. Try doing that with a stack of unrated banks from frontier markets—pricing will hurt.

Common Missteps to Avoid

• Late confirmation request: Asking for confirmation after issuance causes amendments, delays, and extra fees. Bake it into the LC application.
• Ambiguous LC terms: Vague shipment or document wording invites discrepancies. Nail the details before issuance.
• Mismatched Incoterms and LC obligations: If the LC wants an on‑board bill of lading and you’re shipping FCA, you have a problem. Align trade terms with LC requirements.
• Ignoring sanctions and AML flags: Banks won’t confirm or pay if parties or goods are sanctioned. Get screening done early.
• Assuming confirmation equals perfection: It doesn’t. You still need clean docs. Invest in a competent freight forwarder or document prep firm.

Sector Examples

Commodity traders: Often ship to buyers in emerging markets. Confirmation is standard when dealing with state‑owned buyers whose banks may delay. Cost is baked into the premium.

Capital equipment manufacturers: Long lead times and big tickets make payment certainty critical. Confirmation plus milestone LC tranches is common.

Fashion and consumer goods: Short cycles, lower margins. Many stick with unconfirmed LCs from strong jurisdictions to save fees.

Pharma and healthcare supplies: Regulatory delays increase tenor risk; confirmation helps manage late payment exposure.

FAQ: Confirmed vs Unconfirmed LC

Is a confirmed LC always safer?

Safer from a payment‑default standpoint, yes. Still, you can suffer if you miss document terms. Safety doesn’t replace discipline.

Can I convert an unconfirmed LC into a confirmed one later?

Yes, by amendment or by a silent confirmation. Both cost time and money. Better to specify confirmation upfront.

What is silent confirmation?

A bank privately undertakes to pay the exporter without notifying the issuing bank. It avoids amendment hassle but fees can be higher, and legal comfort differs.

Do I always need the advising bank to be the confirmer?

No. The issuing bank can request any bank to confirm. Exporters can also arrange confirmation through their relationship bank.

Does UCP 600 force a bank to confirm?

No. Confirmation is discretionary. A bank evaluates risk, pricing, and country limits before saying yes.

What about ISP98 or URDG758?

Standby LCs often fall under ISP98, and guarantees use URDG758. The confirmation logic is similar: add another obligor to cut counterparty risk.

How to Decide: A Practical Checklist

• Issuing bank credit quality: Rated? National champion? Thinly capitalized?
• Country risk: Transfer restrictions? FX volatility? Political noise?
• Tenor: Sight vs 180 days. More time equals more risk.
• Ticket size: Board thresholds for mandatory risk mitigation.
• Working capital needs: Plan to discount? Confirmation lowers cost of funds.
• Buyer relationship: First deal or long‑standing partner with a clean payment record?
• Insurance requirements: Will your credit insurer demand confirmation?

Drafting Tips for Clean LCs

• Use precise shipment terms, dates, and document names. “Latest shipment date 30 Nov 2025” beats “ship by end of November”.
• State who pays which bank charges (e.g., “all bank charges outside applicant’s country for beneficiary’s account”).
• Align Incoterms with document requirements: FCA vs FOB vs CIF each trigger different paperwork.
• Keep presentation periods realistic. Seven days after shipment is tough with multimodal logistics.
• Include a clear reimbursement mechanism for the confirming bank (MT742/747 instructions) to avoid post‑payment disputes.

Confirmed vs Unconfirmed: Decision Matrix

Run this logic:

• If issuing bank risk + country risk + tenor > your internal risk appetite → push for confirmation.
• If your cost of capital saved by discounting is greater than confirmation fee → confirm.
• If the buyer’s bank is AA‑rated, in a stable jurisdiction, and tenor is short → unconfirmed may suffice.
• If your board or insurer mandates confirmation above a set amount → no debate, confirm.

Sales Section: How We Help You Close, Not Just Talk About It

You’ve seen the theory. Now to execution. We arrange and negotiate confirmed letters of credit and standby LCs for exporters shipping into risky jurisdictions, and for Indian companies that need RBI‑compliant guarantees or SBLCs. Our team coordinates issuing and confirming banks, locks down clean LC text, and keeps the file alive until funds hit.

• LC Structuring: UCP 600 / ISP98 wording, reimbursement clauses, presentation timelines—clean and bankable.
• Bank Selection: We match bank appetite to your counterparty and country risk, so confirmation is approved without drama.
• Fee Negotiation: Confirmation, advising, negotiation, amendment—priced up front so you stop guessing.
• Document Support: Checklists and pre‑screening so your first presentation lands “clean”.
• Post‑Shipment Finance: Discounting options on confirmed LCs to free up working capital.

Disclaimer

This article is informational. It doesn’t constitute legal or regulatory advice. Always align LC structures with applicable law (including FEMA/RBI rules for India) and your own compliance teams.