When you are making a large transaction, as the purchaser or buyer, the seller may require that you obtain and provide a bank proof of funds letter. This should not be confused with a bank letter of credit as they are two completely different documents. The most common use for a bank proof of funds letter is in a real estate transaction where the seller wants to ensure that the buyer has the funds to complete the purchase before going through all the paperwork.
Bank Proof of Funds and Bank Letter Of Credit
The proof of funds letter from bank is simply a statement from a bank or approved and recognized financial institute to verify that a particular individual has a deposit of a specific size in their bank or financial institute. The bank is not guaranteeing payment or any other terms; they are merely verifying that a specific deposit amount is in their institute.
On the other hand, a bank letter of credit not only states that the deposit is in their accounts but actually guarantees that they will pay if, for any reason, the buyer does not complete the terms of the sales agreement. This is typically only used for very large purchases between companies or for international types of purchases.
Why a Bank Statement Won’t Do
Many people assume that a bank statement or a verification of the amount currently in an account would serve the same purpose as a bank proof of funds letter. While in some ways it could there are a lot of ways that the total may not accurately reflect the actual deposit amount.
For instance, a deposit could be made into an individual account simply to obtain a balance. As soon as the balance was used as proof of the amount in the bank it could be immediately withdrawn, constituting a fraud as a misrepresentation of the account balance.
A bank proof of funds letter shows the seller that the funds are legally in the account and there is no fraud involved in the deposit or the actual amount indicated on the letter. This is important for the seller as it establishes that the buyer is legitimate and able to complete the transaction.
