Proof of Funds, sometimes referred to as a POF, is a financial document, usually a statement or letter, which shows one party to the next there is financial capability and funds available to complete a given transaction.
It is most often provided by the account holder's bank in the form of a bank letter specific to the transaction in question.
The bank letter assists the inquiring party with confidence there is cash funds available, that they are obtainable and legitimate.
A POF may also be used in the preliminary stages of credit enhancement when applying for financing or attempting to engage a party for several purposes including, but not limited to acquisitions of businesses, materials, equipment, automobiles, real estate, REOs, as well as banking instruments and financial instruments.
Most Proof of Funds statements are based on a cash account, or the funds in a cash-backed bank account requiring account verification.
When a borrower or purchasing party lacks the credit worthiness on their own a debt-based cash account can be acquired through a joint venture with an asset holder on a fee basis.
In this case the cash account is opened for the purpose of credit enhancement giving the borrower access to superior purchasing or lending terms otherwise not available.
With an increased credit rating due to the credit enhancement the requesting third-party feels more secure a borrower will be able to make timely payments; and in the case of selling or buying assets the third party will feels more at ease they are dealing with a party who have obtained a higher credit rating and capability to follow through on the transaction.
A Proof of Funds Letter is not commonly used in consumer products for purchases and financing.
When purchasing a home a seller or underwriter (if a mortgage is required) will ask for evidence of down payment, usually evidenced by a simple bank statement or escrow account statement or escrow letter.
The same would apply for applications for financing or purchases and leases of automobiles.
A verification of deposit or other simple confirmation letters would be used for bank account verification and balance confirmation in mortgage loan underwriting.
In commercial financing a POF helps meet underwriting reserve requirements.
Having a reserve fund or cash reserve can easily be satisfied through a bank, trust, or escrow issued statement or letter.
Unlike the typical formatting of a Verification of Deposit statement or letter, a POF letter does not usually need to show the opening balance, current balance, or average balance.
Neither does it need to show transactional history or statement history, nor give details whether an account holder at a particular bank or trust has outstanding loans, credit cards, or savings accounts.
Instead, a Proof of Funds Letter issued by an account holder's bank, trust, or escrow attorney simply has language designed to verify they is legitimate funds for a specific transaction on account without going into many of the other account history, balances, etc.
Disclosure of the origin of funds evidenced by a Proof of Funds Letter may or may not be a requirement of the inquiring party.
If the origin of the funds is required to be stated in the letter the bank, trust, or escrow attorney will usually make such representations in the language of the body of the letter.
Some third parties do not allow funds that come in the form of borrowed money.
Obscuring the origin of funds is a criminal offense and easily avoided by upfront disclosure.
Some third parties are simply seeking to comply with general Patriot Act law to ensure money laundering and monies of criminal origin do not find their way into the transaction of record.
When requested the bank, trust, or escrow attorney can draft up an adequate funds letter making the necessary representations to stay within requests for compliance with US and international banking laws and policies.
Seasoned funds may be another concern when dealing with transactions asking for Proof of Funds.
As a way to deter parties from using funds borrowed from other sources an institution, company, lender, or seller may require evidence the cash funds be in the account for one to six months.
Seasoned funds can also be evidenced in the format of simple bank statements, trust statements, or a Verification of Deposit; however the letter can easily satisfy seasoning guidelines if addressed properly in the language.
Delivery can occur in a variety of ways.
The funds statement or letter be faxed, emailed, sent bank to bank via time tested telex, by hard copy courier, or hand delivered by the account holder directly.
In trade finance, project finance, global finance, or asset finance it is also commonly issued by the banking protocol called SWIFT.
SWIFT messages have a whole series of message types assigned to various financial transactions.
The series of messages electronically delivered through SWIFT relevant to Proof of Funds is done often by a bank Conditional SWIFT MT103 or through free formatted message types like SWIFT MT799, and less commonly SWIFT MT999.