Bank Confirmation Letter: Definition, Importance, Analysis, and much more!

What is a Bank Confirmation Letter?

A Bank Confirmation Letter can be defined as a letter from the bank or any other financial institution that confirms the existence of a loan or a line of credit extended to the borrower.

This letter acts as an official document that vouches for the fact that the borrower is allowed to borrow a specified amount of funds for a specific purpose. The borrower in this regard can be an individual, a company, or an organization.

However, it must be understood that the bank confirmation letter is not a guarantee of payment. It is just an assurance that the buyer has sufficient financial resources to complete a given purchase.

Therefore, the purpose of the bank confirmation letter is to act as a letter that reinstates the borrower’s creditworthiness. This letter can also be issued for companies that enter into a joint venture project with another company.

For individuals, a bank confirmation letter might be required to purchase a given property to secure a mortgage or establish creditworthiness before the seller sells the goods and services.

How does a Bank Confirmation Letter work?

The underlying purpose of a bank confirmation letter is to assure third parties that the borrower has access to financial resources in order to complete a required transaction.

Therefore, the confirmation letter is also referred to as a comfort letter because it comforts the seller that the buyer has sufficient provision of financial resources to oblige with the financial commitments they have made.

Since they act as a guarantee on the part of the buyer, bank confirmation letters require the signatures of representatives of the bank or the financial institution that is authorized to issue such a correspondence.

See also  What Are the 3 Important Types of Monetary Systems?

However, it must be noted that bank confirmation letters cannot be transferred from one party to another or from one type of transaction to another. This is because bank confirmation letters are most relevant to a certain project only.

In other words, they are only pertinent to a particular transaction or object. If the bank’s customer chooses to enter into a different deal or purchase, the customer must obtain a new letter of confirmation.

For example, let’s assume that a bank customer intends to purchase a property located in a particular location.

If the customer chooses to purchase another property in a different location, they can no longer use the same bank confirmation letter. In fact, they will be required to use another bank confirmation letter that needs to be applied for and issued all over again.

Most common uses of Bank Confirmation Letters

Bank confirmation letters are mostly used by a business or corporate customers of the bank. With the bank confirmation letter, banks mostly vouch for the existence of a specific line of credit. This helps the sellers to gather reassurance relating to a larger number of goods that the company can then sell.

Bank confirmation letters are also used by companies that enter into a joint venture agreement with another company.

Even though the bank confirmation letter does not guarantee payment or provision of funds, it provides assurance relating to the company’s high profitability that receives payment from the customer from the bank’s customer.

As far as individuals are concerned, the most common use of the bank confirmation letter by individuals is when individuals purchase any property. When individuals choose to purchase a given property, and the seller requires a bank confirmation letter, the bank sends the letter to the seller, indicating that the bank’s customer has been approved for a mortgage for a specified amount of time for a proposed purchase.

See also  What Is A Good Retained Earnings To Assets Ratio?

Again, it is important to reinstate that bank confirmation letter is not regarded as a commitment to purchase the property. In fact, it merely acts as a reassurance that the bank’s customer does have access to funds to complete a purchase.

How can Bank Confirmation letters be obtained?

The bank can issue a bank confirmation letter once the customer has requested the bank for the letter to be issued. In this case, the bank issues the letter with the required signatures so that the customer can be used elsewhere.

The typical timeline that is taken to obtain a bank confirmation letter is contingent on a couple of factors. These factors mostly include:

  • Relationship of the bank with the customer
  • Credit history of the customer with the bank
  • The economic conditions – macroeconomic conditions often impact the risk factor of corporates, as well as banks. Depending on business performance, and business cycles, banks might require a longer timeline to gather data based on which they will then issue the letter.
  • The transaction involved – the transaction involved and the borrower’s financial position. If the borrower is asking for a bank confirmation for a transaction higher than what they can actually afford, it might result in delays in obtaining the bank confirmation letter.

What is the difference between Bank Confirmation Letter and Bank Verification/Certification Letter?

The bank confirmation letter acts as a guarantee on behalf of the purchaser of the goods. On the other hand, bank verification, or bank certification letter, merely acts to validate that the individual has an account with the said bank. The account has the following balance (if required to be disclosed).

See also  What Does Release of Working Capital Mean? (Explanation)

Therefore, bank confirmation is a document vouching for creditworthiness, whereas bank certification merely acts to communicate the existence of the bank account in the said bank.

Individuals and companies might require bank confirmation and bank verification for different reasons. However, it must be noted that both these documents serve different purposes.

Importance of Bank Confirmation Letters

Bank Confirmation Letters are important source documents for several different reasons. These reasons are as follows:

  • It strengthens the seller’s faith that the borrower will be able to pay back the money.
  • It helps the buyer close the deal, since the seller already has a guarantee regarding the buyer’s creditworthiness.
  • It helps businesses grow and expand since they can obtain extended credit from suppliers due to bank confirmation letters. This opportunity opens new doors and avenues for businesses, which can now achieve more significant and faster growth rates.
  • Bank confirmation letters can help organizations and individuals build their credit history over time. These documents can be used in future transactions to reflect the bank’s faith in the individual or the corporate.