An irrevocable letter of credit is a financial instrument used by banks to guarantee a buyer’s obligations to a seller. It is irrevocable because the letter of credit cannot be modified unless all parties agree to the modifications.
In an Irrevocable Letter of Credit L/C the importer´s bank agrees to the exporter (called “the beneficiary”) that the exporter will get paid if it can prove it has shipped the proper goods by providing the corresponding documents required by the Letter of Credit. Exporters like Letters of Credit because the advance assurance of payment ensures the seller that it will not waste time preparing or shipping an order to a buyer who ultimately refuse to accept or pay for the goods.
There are two basic forms of letters of credit: Standby and Documentary. Documentary letters of credit can be either Revocable or Irrevocable, although the first is extremely rare. Irrevocable letters of credit can be Confirmed or Not Confirmed. Each type of credit has advantages and disadvantages for the buyer and for the seller, which this information will review below. Charges for each type will also vary. However, the more the banks assume risk by guaranteeing payment, the more they will charge for providing the service.
An Irrevocable Letter of Credit cannot be amended or cancelled without the consent of all Parties.
The terms “Letters of Credit” and “Documentary Credit” mean the same thing. Exporters, importers and bankers in some parts of the world (USA, Asia) tend to use the term “Letter of Credit” or the abbreviation “L/C”, while in other areas (Europe) prefer to use “Documentary Credit” or “D/C”.