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What is an irrevocable letter of credit? Know its working, benefits, example, and cost
Irrevocable letter of credit provides security of payment to its beneficiary, who is usually an exporter. Learn more about its benefits, uses, and examples in the blog.
For Indian exporters, navigating global trade can be complex, especially when it comes to securing timely payments from overseas buyers. Late payments, defaults, or disputes often create uncertainty and strain business relationships. To safeguard against such risks, exporters and importers frequently rely on financial instruments that provide security and build trust. One of the most widely used among these is the irrevocable letter of credit (LC). This blog covers what is an irrevocable letter of credit, its meaning, working, benefits, example, costs, and its difference from a revocable LC.
What is an irrevocable letter of credit (ILOC)?
An irrevocable letter of credit (ILOC or irrevocable LC) is a documentary arrangement for international trade payment that cannot be cancelled or amended without the explicit agreement of all parties (importer, exporter, and issuing bank). This LC is an official correspondence from the bank that guarantees payment for goods being purchased by the importer who requests the letter of credit. The issuing bank is bound by the commitments mentioned and cannot change any terms of an ILOC once issued.
The ILOC is irrevocable and is frequently used for large transactions. It reduces additional credit risk involved when two parties are unfamiliar with each other. ILOC helps exporters receive payment as it is a guarantee by the issuing bank (importer’s bank) that payment will be made by the bank if the importer fails to do so.1
The ILOC is irrevocable and is frequently used for large transactions. It reduces additional credit risk involved when two parties are unfamiliar with each other. ILOC helps exporters receive payment as it is a guarantee by the issuing bank (importer’s bank) that payment will be made by the bank if the importer fails to do so.1
Conditions associated with an irrevocable letter of credit
The conditions of ILOC are fixed and cannot be amended without the consent of the parties involved. The stakeholders (importer and exporter) must agree on all the clauses mentioned in this letter under different scenarios. This letter specifies provisions for security, blacklisting, boycott, misconduct, and any other scenario or conflict. ILOC also makes provisions for disbursements in different situations, possession of goods, and acknowledgment of documents in conformity with terms and conditions.2
How does an irrevocable letter of credit work?
An ILOC works through a series of coordinated steps between the buyer, seller, and their respective banks:
Step 1: Agreement between buyer and seller
The buyer and seller agree on using an irrevocable LC as the payment method in the sales contract, specifying terms such as shipment date, goods description, and required documents.
Step 2: Issuance of ILOC
The buyer’s bank issues the ILOC in favor of the seller, guaranteeing payment once the seller presents compliant documents. This LC is sent to the seller’s bank.
Step 3: Shipment and payment
The seller ships the goods, submits the required documents to their bank, and upon verification, the payment is made by the issuing bank.3
How to get an irrevocable letter of credit work
Obtaining an ILOC is a structured process that begins with the importer:
Step 1: Application with the issuing bank
The importer, after agreeing on the terms with the exporter, applies for a letter of credit to their bank. The application details all conditions of the trade, including the amount, documents required, expiry date, and goods being traded.
Step 2: Bank approval and issuance
The bank evaluates the importer’s financial stability and credit history. Based on this assessment, the bank either approves or denies the application. If approved, the bank issues the ILOC.4
Contents of irrevocable letter of credit
An ILOC is a detailed legal document that includes specific information to ensure clarity and enforceability. The content typically includes:
● The names and addresses of the applicant (importer) and the beneficiary (exporter).
● The name and address of the issuing bank and the advising bank.
● The maximum amount of the credit and the currency.
● The expiration date of the credit.
● A description of the goods or services.
● A list of all required documents to be presented for payment.
● The latest date for shipment and the place of loading and destination.
● Confirmation of its irrevocability.5
● The name and address of the issuing bank and the advising bank.
● The maximum amount of the credit and the currency.
● The expiration date of the credit.
● A description of the goods or services.
● A list of all required documents to be presented for payment.
● The latest date for shipment and the place of loading and destination.
● Confirmation of its irrevocability.5
Template of an irrevocable LC
6
Example of irrevocable letter of credit
For example, an Indian ayurveda exporter secures an order from a US company. The US bank issues an ILOC for $80,000, payable upon submission of a bill of lading, insurance, and packing list. After fulfilling the export shipment and presenting the documents, the Indian exporter receives guaranteed payment, independent of the US buyer’s financial status, provided the LC terms are met.7
Benefits of an irrevocable letter of credit
Benefits for importers
With a letter of credit, an importer is able to verify that the financial institution is willing to guarantee the transaction amount. The importer is assured of receiving the entire shipment agreed upon, which builds confidence in the transaction. It also improves the creditworthiness of the buyer or importer.
Benefits for sellers
If the importer cannot pay the entire amount owed, the seller receives money from the bank that issued the letter of credit. This guarantees payment for the seller, providing a secure payment method.8
Cost of obtaining an irrevocable letter of credit
The cost of an ILOC depends on transaction size, applicant creditworthiness, and issuing bank. Typically, banks charge 1 to 2% of ILOC value annually, with additional fees for amendments, confirmations, and document checking.9
Alternatives to irrevocable letter of credit
Standby letter of credit
The bank issues a Standby Letter of Credit to the exporter, which guarantees that if the importer (the bank's client) defaults on the payment, the bank will uphold its commitment and pay the exporter.10
Purchase order financing:
In this case, a financing company pays the supplier of goods on behalf of the buyer. After the supplier ships the goods to the buyer, the buyer pays the receivable to the finance company.11
Invoice factoring
Invoice factoring means selling unpaid invoices to a third party that collects the payment on a later date in exchange for a cash advance. It helps exporters fill the gap between when an invoice is created and when the importer pays the bill.12
Difference between irrevocable letter of credit and revocable letter of credit
Aspect
Revocable letter of credit
Irrevocable letter of credit
Can it be changed or cancelled?
The buyer or their bank can change or cancel it anytime without asking the seller.
Once issued, it can only be changed or cancelled if the buyer, seller, and bank all agree.
How safe is it for the seller?
More freedom for the buyer and their bank — they can change the terms of the agreement.
Less freedom for the buyer — all parties must agree before any change is made.
How common is it?
Rarely used in global trade because it puts sellers at a disadvantage.
Very common and preferred in global trade.
Cost
Usually cheaper for the buyer because the bank takes on less risk.
Usually costly as the bank takes on more responsibility and gives a stronger guarantee.
Changes to the document
Can be done without telling or asking the seller.
Any change requires approval from the buyer, seller, and bank.13
Conclusion
For Indian exporters, an irrevocable letter of credit (ILOC) offers payment security in foreign trade, especially when dealing with new or high-value buyers. While it involves certain costs and procedural requirements, the assurance it provides often outweighs the expense. Knowing the purpose of an ILOC can be beneficial for sellers looking to go global.
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Frequently Asked Questions
1. What is a clean irrevocable letter of credit?
A clean LC allows the beneficiary of the credit to draw the bill of exchange without any extra documentation. A clean LC is irrevocable till the period of renewal.
What is the role of the issuing bank in an Irrevocable Letter of Credit?
Even the issuing bank alone does not have the authority to make amendments to the terms of the ILOC unless all parties involved in the ILOC explicitly agree on cancelling or modifying any term of the irrevocable letter of credit.
3. Is an LC always irrevocable?
No, LCs are not always irrevocable. There are revocable LCs as well.
4. Who can issue an irrevocable letter of credit?
An irrevocable letter of credit is issued by a commercial bank (the importer’s bank) that makes sure that the amount is received by the exporter on time.
5. Can an irrevocable LC be cancelled?
An irrevocable LC is a letter of credit that cannot be cancelled or amended without the consent of all parties concerned. This is where the terms and conditions and the amount are renewed or restricted without specific amendments to the credit being needed.
Published on November 28, 2022.
Uppdated on October 13, 2025.
Sources:
1. https://www.unionbankofindia.co.in/pdf/hkb_20_auditpolicylettersofcredit.pdf
2. http://dripcapital.com/en-in/resources/finance-guides/irrevocable-letter-of-credit
3. https://www.investopedia.com/terms/l/letterofcredit.asp
4. https://www.credlix.com/blogs/what-is-an-irrevocable-letter-of-credit-and-how-does-it-work
5. https://www.investopedia.com/terms/i/iloc.asp#toc-alternatives-to-an-iloc
6. https://www.dripcapital.com/en-in/resources/finance-guides/irrevocable-letter-of-credit
7. https://www.investopedia.com/terms/i/iloc.asp#toc-example-of-an-iloc
8. https://www.chandracredit.com/blog-details/76/know-about-irrevocable-letter-of-credit-2024
9. https://www.credlix.com/blogs/what-is-an-irrevocable-letter-of-credit-and-how-does-it-work
10. https://www.investopedia.com/terms/s/standbyletterofcredit.asp
11. https://www.tradefinanceglobal.com/invoice-finance/purchase-order-finance/
12. https://www.shopify.com/uk/blog/invoice-factoring
13. https://www.credlix.com/blogs/difference-between-revocable-and-irrevocable-letter-of-credit
Uppdated on October 13, 2025.
Sources:
1. https://www.unionbankofindia.co.in/pdf/hkb_20_auditpolicylettersofcredit.pdf
2. http://dripcapital.com/en-in/resources/finance-guides/irrevocable-letter-of-credit
3. https://www.investopedia.com/terms/l/letterofcredit.asp
4. https://www.credlix.com/blogs/what-is-an-irrevocable-letter-of-credit-and-how-does-it-work
5. https://www.investopedia.com/terms/i/iloc.asp#toc-alternatives-to-an-iloc
6. https://www.dripcapital.com/en-in/resources/finance-guides/irrevocable-letter-of-credit
7. https://www.investopedia.com/terms/i/iloc.asp#toc-example-of-an-iloc
8. https://www.chandracredit.com/blog-details/76/know-about-irrevocable-letter-of-credit-2024
9. https://www.credlix.com/blogs/what-is-an-irrevocable-letter-of-credit-and-how-does-it-work
10. https://www.investopedia.com/terms/s/standbyletterofcredit.asp
11. https://www.tradefinanceglobal.com/invoice-finance/purchase-order-finance/
12. https://www.shopify.com/uk/blog/invoice-factoring
13. https://www.credlix.com/blogs/difference-between-revocable-and-irrevocable-letter-of-credit
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