The difference between a revocable and an irrevocable letter of credit (LC) lies in the stability and security they offer to the parties involved:
| Revocable LC | Irrevocable LC |
This type of lc can be amended or canceled by the issuing bank at any time without pre-notice to the beneficiary or the exporter.  | An irrevocable lc cannot be changed or revoked without the agreement of all three parties involved including the beneficiary or the exporter. |
It offers more flexibility to the buyer but less security to the seller, as the terms can change or the LC can be withdrawn at any moment.. | This provides a higher level of security for the seller because once the issuing bank has made a commitment it cannot be altered Without everyone consent. |
Key benefits of irrevocable LC:
In international trade, irrevocable LCs are more commonly used because they provide a guarantee that the seller will receive payment as long as they comply with the terms and conditions of the LC.
The irrevocable LC is a commitment by the bank that cannot be amended or withdrawn, which is crucial in transactions involving parties who may not have established trust. It means that LC can’t be amended or cancelled by the issuing bank without the knowledge of the buyer or seller.
Are all LCs irrevocable by default?
By default, all LCs are considered ‘irrevocable’ unless stated otherwise. This means that the document may not be changed unless all the parties, such as the importer, banks and the exporter agree. If the LC is specified as ‘revocable’, the issuing bank can amend or cancel the LC at any point of time without the consent of any other party.
Advantages of using an irrevocable letter of credit (LC) in international trade.
Guaranteed Payment: For sellers, an irrevocable LC provides a guarantee that they will receive payment for their goods or services as long as they meet the terms of the credit.
Reduced Risk: It mitigates the risk associated with international transactions by ensuring that payment is secure and will be made by the issuing bank if the buyer fails to pay.
Creditworthiness: For buyers, it enhances their creditworthiness because the bank’s guarantee backs their position, making it easier to do business with sellers who might otherwise be cautious.
Specific Terms: An irrevocable LC can outline very specific terms, such as insurance requirements, incoterms, government regulation, or documentation requirements, which can help clarify the expectations and obligations of all parties involved.
Legal Protection: It offers legal protection to both parties, as the terms cannot be changed without mutual consent, which can prevent misunderstandings and disputes.
Financial Stability: It can be part of a company’s credit management policy, providing financial stability and protecting cash flow.
Bankruptcy Protection: In large projects, an irrevocable LC is not subject to claims of preference in the event of bankruptcy, providing additional security to the beneficiary.