Types of Proof of Funds Letter

Proof of Funds Letter

What is a Proof of Funds Letter?

In banking a proof of funds letter used as a confirmation letter can effectively be used to assist the account holder show evidence to a third party their account balances enhancing credit worthiness and/or demonstrating their ability with funds available. These letters are usually requested by third parties whom the account holder has engaged for the purpose of transactions that may include asset purchases or acquisitions, loans, leases, and so on.

The format of a proof of funds letter is different from a bank statement. It does not normally show transactional history. While a verification of deposit letter, common to consumer banking, is still classified as a letter used in proof of funds, it has some differences from other types of letters that do not usually reflect the opening date of the account, the beginning balances, nor average balances.

The format of the proof of funds letter can vary generally as it is generically speaking a letter issued by the account holder’s banker reflecting the account holder’s name, account number, current balance, as well as containing language confirming to the other party the account holder has funds available while making any necessary comforts or guarantees specific to the given transaction.

Transactional Proof of Funds Letter

Bank Comfort Proof of Funds Letter

There are many names for the various banking and finance purpose these letters may take. A Comfort Letter (CL), is a letter that can be issued by a CPA or accounting firm affirming a corporation has financial soundness or backing. This is common when making an initial public offering.

With a proof of funds letter, a Bank Comfort Letter (BCL) is written assurance to a buying party on behalf of the seller’s party they are capable and willing to perform their obligations. This is typically common when the seller is unwilling to provide a financial guarantee against a certain outcome, such as the performance of a security or bank instrument.

Bank Readiness Proof of Funds Letter

In international trade with import/export financing there usually comes a time when a buyer or seller bank will be required to issue a bank letter of readiness. This can come in the format of a pre advice SWIFT MT799, or a RWA letter (Ready, Willing, and Able) issued bank to bank. The purpose of course is to signal to the other party bank they are prepared and stand ready to transact. In this way a proof of funds letter can be a critical component closing the transaction in an orderly fashion.

Blocked Funds Proof of Funds Letter

Common to bank debenture buy/sell transactions as well as other high-end finance deals, a blocked funds proof of funds letter is used to ensure funds in an account shall be reserved for a particular transaction. The funds in the account may never need to be depleted or delivered, but must stay in the account and blocked from being used or pledged elsewhere. Blocking funds can either be achieved by a letter issued bank to bank, or by the SWIFT system such as by SWIFT MT760. The MT760 is often used because this message type is designed to make financial guarantees on an asset; however, other SWIFT message types may also be employed.

Verification of Deposit Proof of Funds Letter

For transactions common to real estate purchases whether large or small a verification of deposit proof of funds letter (VOD) is often used to show bank funds capability. This document is often pre-formatted by separate banks to include details of the account holder’s account number, current balance, and average balance. The document can also  include comments and directions from the banker.

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