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Revocable LC vs irrevocable LC: Know the difference

Revocable and irrevocable letters of credit are crucial documents for exporting from India. Learn more about the key differences between them in the blog.

Global market expansion brings exciting opportunities to Indian exporters, but it also raises concerns about payment security. Letters of credit (LCs) offer a reliable solution by serving as a form of payment insurance issued by the buyer’s bank to the seller or exporter. Letters of credit can be of various types, and choosing the correct option is crucial for guaranteeing payment security and strengthening business relationships. In this blog post, we will discuss revocable and irrevocable LCs, when to use them, and the key differences between the two.

What is a revocable letter of credit?

A revocable letter of credit (LC) is a type of LC that can be revoked, altered or canceled by the issuing bank without prior notice to the beneficiary, that is the seller or exporter. This allows the buyer and their bank to change the terms if necessary. Usually, such amendments might involve postponing the credit or modifying the terms of payment. While this flexibility benefits the buyer, it provides less certainty for the seller. Revocable LCs are riskier for exporters as the seller’s payment is not fully guaranteed.

When to use a revocable letter of credit?

The following are some scenarios where revocable LCs might be useful:

1. Established business relationships

Buyers and sellers with a longstanding relationship can opt for a revokable LC as it is unlikely to get revoked.

2. Political or economic unrest

In case either party lives in a climate of political or economic turmoil, banks may prefer issuing revocable LCs.

3. Need for flexibility

A revocable LC is preferable when buyers and sellers have inadequate terms and conditions in their contract or may wish to amend the LC after a particular period.

What is an irrevocable letter of credit?

An irrevocable letter of credit (LC) is a type of LC that cannot be modified or canceled without the agreement of all parties involved, including the buyer, seller, and issuing bank. The issuing bank is responsible for making payments without fail, provided the seller complies with the stipulated guidelines in the LC. Irrevocable LCs provide significantly more security to the seller. They are preferred in international transactions because the seller is guaranteed payment regardless of the buyer's consent or ability, as long as the obligations outlined are met.³

When to use an irrevocable letter of credit?

The following are some scenarios where irrevocable LCs may be used:

1. International trade

An irrevocable letter of credit (LC) is normally utilized in transactions involving parties from different nations, particularly when there is minimal trust between the buyer and seller.

2. High-risk transactions

An irrevocable LC offers an additional layer of security in situations involving high-value transactions. Irrevocable LCs also boost the creditworthiness of importers working on building credit for their business.

3. New business relationships

During initial transactions between parties, an irrevocable LC fosters trust by guaranteeing that the seller will receive payment upon fulfilling the contractual obligations.⁴

Difference between revocable and irrevocable letter of credit

Features

Revocable LC

Irrevocable LC

Modification

Can be modified or canceled without notice

Cannot be modified or canceled without consent

Security level

Low security for sellers

High security for sellers

Common usage

Rarely used in international trade

Widely used in international trade

Risk exposure

Higher risk for sellers

Lower risk for sellers

Flexibility

More flexible for buyers

Less flexible but more secure

Cost

Less expensive than irrevocable LCs due to the reduced level of security.

More expensive since it provides enhanced security and guaranteed payment.⁵

Conclusion

Choosing between a revocable and irrevocable letter of credit depends on the specific needs of the transaction. A revocable LC may suffice if a business is willing to trade some security for more flexibility and established trust. However, for international trade or high-value transactions, an irrevocable LC is preferable as it mitigates risks and guarantees payment. For more support on payment mechanisms and documentation, e-commerce exporters can leverage the tools and services offered by e-commerce export programs like Amazon Global Selling.

Amazon Global Selling: Easy e-commerce exports and hassle-free shipping

If you are a business owner and you want to sell your products to the world, Amazon Global Selling enables you to list and sell ‘Made in India’ products on 18 Amazon global marketplaces. As an e-commerce export program, Amazon Global Selling provides support and guidance at every step of your export journey, connecting you to Amazon’s Service Provider Network for tailored compliance, payments, and logistics support.

Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for fulfilment by Amazon (FBA) and outsource order fulfilment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.

Frequently Asked Questions

1. What to choose between a revocable or irrevocable letter of credit?

Choosing between a revocable and irrevocable letter of credit depends on the level of risk you're willing to take. If you're a seller seeking security, an irrevocable LC is the better option as it guarantees payment. A revocable LC, on the other hand, offers flexibility but comes with higher risks for sellers.

2. Who issues the letter of credit?

Both revocable and irrevocable letters of credit are issued by the buyer’s banks.

Published on November 29, 2024.

Sources:

1. https://www.investopedia.com/ask/answers/110614/what-are-different-types-letters-credit.asp
2. https://sell.amazon.in/grow-your-business/amazon-global-selling/blogs/revocable-letter-of-credit
3. https://www.dripcapital.com/en-in/resources/finance-guides/irrevocable-letter-of-credit
4. https://sell.amazon.in/grow-your-business/amazon-global-selling/blogs/irrevocable-letter-of-credit
5. https://www.credlix.com/blogs/difference-between-revocable-and-irrevocable-letter-of-credit

Related blogs

Letter of credit: Know the meaning, types, working, and benefits

Revocable letter of credit: Everything you need to know

What is an Irrevocable Letter of Credit?

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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

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