A Letter of Credit (LC)
is a payment method
used by businesses – it is a document issued by a bank or a financial institution that guarantees that the exporter will receive payment from the importer on time for the full or remaining amount. Among the many types of LCs, an Irrevocable Letter of Credit (ILOC) is a guarantee for payment issued by the importer’s bank for the transaction of goods between importer and exporter, which cannot be cancelled during any specified time period. ILOCs are mostly used to facilitate international trade and offer additional risk protection for the exporter by providing a guarantee of payment from both the importer and exporter’s banks.
What is an Irrevocable Letter of Credit?
As the name suggests, an Irrevocable Letter of Credit 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 it 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 facilitates international trade because of the additional credit risk involved when two parties are unfamiliar with each other. ILOC helps exporters with receiving payment because this is a guarantee by the issuing bank (importer’s bank) that payment will be made by the bank if the importer fails to do so1.
Conditions associated with an Irrevocable Letter of Credit
The conditions of ILOC are fixed and cannot be amended without the consent of the involved parties. The stakeholders (importer and exporter) have to agree on all the clauses mentioned in this letter under different conditions. This letter specifies more provisions about security, blacklisting and boycott, if there is any misconduct. Besides terms and conditions, authority is also defined for disbursements in different situations, possession of goods and acknowledgment of documents in conformity with terms and conditions of the credit2.
How to get an Irrevocable Letter of Credit?
To obtain an ILOC, you need to approach a bank, who assigns a representative with prior experience in international trade and related compliance. It is suggested that you do not draft your own ILOC and this may lead to legal and financial complications.
Template of an Irrevocable LC
An Irrevocable Letter of Credit usually includes the following3:
• Name of the issuing bank or financial institution
• Letter of Credit number
• Date of issue
• Applicant details and amount
• Date and place of expiry
• Conditions of the transaction
• Authorized signature of the banking professional
Cost of obtaining an Irrevocable Letter of Credit
The cost of an Irrevocable Letter of Credit depends on the type of ILOC used, customer credit history, tenure, safeguarding clauses and various other factors4.
Irrevocable LC is used to ensure safe and secure payments that also benefits both – importer and exporter. With e-commerce exports, reaching international customers and receiving payments has become easier and simpler than before. Amazon Global Selling not just enables you to export to 200+ countries and territories but also helps you receive payments directly to your bank account in INR or other currency of your choice.
Easy e-commerce exports with Amazon Global Selling
Amazon Global Selling
is an e-commerce exports program that helps exporters take their businesses from India to 18 international markets across 200+ countries and territories. Whether you are a manufacturer, seller or you have an emerging brand, Amazon Global Selling supports you to expand your brand using state-of-the-art tools for listing and logistics, among others.
Published on November 28, 2022.
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