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What is an irrevocable letter of credit?

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.

Irrevocable letters of credit are often used to facilitate international trade because of the additional risks involved. The irrevocable letter of credit removes the seller's credit risk by assuring the seller that payment will be made by the buyer's bank if the buyer does not pay the seller.

In an irrevocable letter of credit, the buyer is known as the applicant, the seller is the beneficiary, the buyer's bank is the issuing bank, and the seller's bank is the advising bank.

See our related post: What is a letter of credit?