Irrevocable Letter of Credit - Explained
What is an Irrevocable Letter of Credit?
Written by J. Mance Gordon
Updated at April 19th, 2024
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What is an Irrevocable Letter of Credit?
An irrevocable letter of credit is a financial document from a financial firm that guarantees the buyer's payment obligation to the seller.
- Read about how a Letter of Credit works.
It is referred to as irrevocable because it cannot be canceled or altered at any time without the agreement of the beneficiary, client, and issuing bank.
An Irrevocable letter of credit is common in the international trade.
The document enables traders to do business transactions with confidence because it gives the seller payment assurance.
Apart from offering credit risk protection to the seller, the document consists also of other transaction details such as:
- Price of the goods
- Terms of payment
- Delivery time
- Where to deliver the goods
The buyer who initiates this process by requesting an ILOC from his or her bank. The document is then given to the seller, who must comply with the letter of credit to be paid.
Other Characteristics of an Irrevocable Letter of Credit?
- Standby - A standby ILOC is held standby in case there is a payment default by the buyer. Companies use this letter of credit when dealing with new customers. It serves as insurance against lack of payment.
- Documentary - Most letters of credit are documentary. It means that the Buyer is paid on the letter of credit once s/he presents the required ownership documents.
- Fully-Funding - A Fully Funded Irrevocable letter of credit means that the Applicant (seller of goods) has deposited the funds for the letter of credit with the bank prior to the bank issuing a letter of credit. It's similar to putting funds in escrow.