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 so
Contents of an ILOC
Each irrevocable letter of credit may address a unique creditor or situation. Generally speaking, all irrevocable letters of credit will contain roughly the same information. This information includes but is not limited to:
- Information on the Issuing Bank: The ILOC should clearly identify the name, address, and phone number of the financial institution that issuing bank of the letter.
- Information on the Buyer or Applicant: The ILOC should include the buyer's or applicant's name, address, and contact information in order to identify them. The applicant is the party asking for the ILOC to be issued.
- Information on the Beneficiary: The ILOC should identify the seller or beneficiary and include their name, address, and phone number. The beneficiary is the person or entity who will receive money after the ILOC's terms and conditions are met.
- Dollar Amount: The particular dollar amount that the issuing bank is guaranteeing should be stated in the ILOC. This number is the maximum cash that the beneficiary may receive from the bank upon fulfillment of the ILOC requirements.
- Expiration Date: The ILOC should provide the date by which the beneficiary must submit the necessary paperwork in order to receive payment.
- Other Terms and Conditions: The ILOC will specify the requirements that the beneficiary must satisfy in order to be paid. These criteria could specify that goods be shipped, inspected, documented, and in accordance with all applicable rules and laws.
- Required Documentation: The ILOC will detail the precise documentation that the beneficiary must provide to the issuing bank in order to receive payment. Commercial invoices, transportation records (including airway bills or bills of lading), origin-certification records, and inspection records are examples of common papers.
- Prevailing Governing Regulations: The ILOC may specify the regulations that apply to the transaction such as the Uniform Customs and Practice for Documentary Credits (UCP 600).1
- Shipments in Parts: The ILOC may state whether or not shipments in parts are permitted. If partial shipments are allowed, it should specify the restrictions and requirements that apply to them.
- Port of Loading/Discharge: In order to ensure that items are carried as agreed, the ILOC may request the beneficiary to identify the chosen port of loading and discharge for the shipment. This may also extend to International Commercial Terms (incoterms) which control delivery and the transfer of risks between the buyer and seller.
- Insurance Requirements: The ILOC could specify what kind of insurance is needed for the cargo, how much insurance is needed, and any other particular guidelines.