What is an irrevocable letter of credit?

Definition of 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 assures the seller that it will be paid by the bank if the buyer fails to pay.

Also see our related post: What is a letter of credit?

Note that the irrevocable letter of credit is different from a line of credit.