A proof of funds (POF) is a document or bank statement proving that a person has the financial ability to perform a transaction. For instance, a POF is generally obligatory for people seeking mortgages as bankers are often more willing to issue them to those who have the sufficient funds to pay their mortgages off as opposed to those who cannot do so. Thus, a POF letter provides the selling or lending party with confidence that the funds are obtainable and legitimate.
Contents
How Proof of Funds May Be Used in Practice
A POF is commonly used when funding large-scale investments such as buying a house or property as real-estate agents tend to demand evidence that the buyer has such affordability. One way in which a person can acquire a POF, is by requesting the bank to confirm and approve the amount of cash that the person has on hand. The bank should also approve of the availability and legality of the funds to be used as a transaction before the funds can be transferred. If interested in buying property, The property beneficiary should be convinced of the fact that the buyer has such affordability to buy such property. However, since every POF document has an expiry date, at which point the document becomes of no use to the seller, it is essential to keep it up to date especially as the buyer's POF submission and the seller's process of approval can, in some cases, consume a substantial amount of time, taking weeks and even months to finish the process.
Leased Proof of Funds
A POF can in some cases be borrowed or leased, which is where a client pays a fee for cash to be deposited into their personal or business bank account, but the cash is limited by the bank as the client is not permitted to withdraw it or complete transactions with it. By keeping the funds unable to be used, it safeguards the asset holder and makes them ensure that the cash can solely be used to complete POF transactions based on what the loan agreement dictates.
Standby Letter of Credit
A Standby Letter of Credit (SLOC) is a letter issued by a bank guaranteeing payment to a beneficiary in case the buyer or customer fails to pay the seller at a given time period. SLOCs are usually used when doing international trading between different countries to avoid conflict as they are a way of building credibility and trust in assuring unknown sellers with confidence that they will receive their payment. Another way of ensuring that beneficiaries receive their payment is through collateral, which is where lenders demand assets and properties of certain value (depending on the value of the loan from the loaner) from loaners as a form of security before handing out loans to them.
Blocked Proof of Funds Letter
A blocked POF letter is a letter from a financial institution or government that approves the halting or reserving of a person's funds on behalf of them. Governments can reserve a country's funds by restricting the maximum amount of funds that is allowed to be spent at a certain period of time in order to control the country's cash flow. Other circumstances where funds may need to be blocked may be due to political or emergency reasons such as during war or following the death of an account holder.