What is an Irrevocable Letter of Credit (LC)?

An Irrevocable Letter of Credit (Irrevocable LC) is a type of Letter of Credit that cannot be amended or canceled without the agreement of all parties involved in the international business, including the buyer (importer), the seller (exporter), and the issuing bank. This makes it a more strong option for both the seller and the buyer compared to a Revocable LC.

Main Characteristics of an Irrevocable LC:

1. No Changes Without Agreement: If it is once issued then the terms of an irrevocable LC are fixed and cannot be modified or canceled unless both parties (buyer and seller) agree and provide the certainty for both parties.
2. Security for Seller: The seller can be confident that the terms & conditions of the LC will not change and that payment will be made if the conditions are fulfilled. It guarantees the seller’s payment as long as they follow the terms & conditions.
3. Security for Buyer: While it provides commitment to the seller that it also maintains the buyer by ensuring that payment will only arrive if the seller meets all specified terms & conditions, such as handing over the goods or services according to the agreement.
4. Documents Only: Payment is founded solely on the documents submitted by the seller (not the goods themselves), confirming that the seller is paid once the correct documents are submitted.
5. Irrevocability Clause: The irrevocable nature is apparently stated in the LC. These offers are more secure than a revocable LC for both parties, particularly the seller.

Comparison with Revocable LC:

• Irrevocable LC: It cannot be changed or canceled without any mutual agreement; it offers a higher level of security and trustworthiness.
• Revocable LC: It can be changed or canceled at any time without the seller’s permission, which makes it riskier for the seller.

When to Use:

• International Trade: Always used in international & global trade to provide commitment that the buyer’s obligations will be fulfilled.
• High Trust and Undertaking: When both buyer and seller need certainty that the terms & conditions will remain unchanged, and payment will only be made when the terms & conditions are fulfilled.
• Large Transactions: It is common for large transactions or when the goods are being shipped across borders where the seller needs assurance of payment before shipping goods.