A Revocable Letter of Credit (LC) is a type of Letter of Credit which can be amended or canceled by the buyer (importer) or the issuing bank at any time, without the permission of the seller (exporter). This makes it lower secure for the seller compared to an irrevocable LC, which cannot be changed or canceled without mutual agreement.
Main Characteristics of A Revocable LC:
- Flexibility: The terms of the LC can be modified or canceled without the seller’s consent which is offering flexibility for the buyer.
- Risk for Seller: Since the seller cannot believe in the LC being final, it is predicted to be risky for them. If changes are made or the LC is canceled then the seller will not be paid.
- Used Less Commonly: Revocable LCs are not commonly used in international or global business due to their insecurity for sellers. Most buyers and sellers always prefer an irrevocable LC for added commitment.
- Payment: If the LC is not canceled or modified then the payment will be made when the seller submits the required documents as per the LC terms & conditions.
Differentiate with Irrevocable LC:
- Irrevocable LC: If it is once issued then it cannot be changed or canceled without any mutual discussion. This makes it much preferable & safer for the seller.
- Revocable LC: The buyer or the bank can modify or cancel it at any time without mutual discussion & consulting the seller, which raises the significant risk for the seller.
When to Use:
- Rare in Trade: The revocable LCs are generally only used in the situations where the buyer and seller have a strong relationship, and the buyer wants more flexibility to import goods.
- Less Security for Seller: When the seller is confident & trusts that the buyer will not change or cancel the LC but still wants a level of security for transactions.
