GloTradX – Transforming Global Transactions

Revocable and Irrevocable Letters of Credit

Letters of Credit are either revocable or irrevocable. The distinction determines whether the terms of the credit can be changed or cancelled after issuance.

Revocable Letters of Credit

A revocable Letter of Credit allows the issuing bank to modify or cancel the credit at any time without notice to the beneficiary. This gives the buyer flexibility but offers little protection to the seller.

Because revocable credits create uncertainty, they are rarely used in international trade. Exporters prefer assurance that payment terms cannot change once goods are shipped.

Key Points for Revocable Credits
  • The issuing bank can amend or cancel the LC without consent from the beneficiary.
  • The bank has no obligation to honour a presentation made before cancellation unless it has already accepted or paid.
  • The exporter carries higher risk since the LC can change after shipment.

Revocable credits are used only in exceptional cases, often for transactions within the same corporate group or between long-term partners where trust is established.

Irrevocable Letters of Credit

An irrevocable Letter of Credit cannot be amended or cancelled without agreement from all parties, including the beneficiary. It provides stronger protection and is the standard form used in global trade.

Under UCP 600, every Letter of Credit is deemed irrevocable unless it explicitly states otherwise.

Key Points for Irrevocable Credits
  • The issuing bank must honour payment once the exporter presents compliant documents.
  • Amendments or cancellations require consent from the issuing bank, confirming bank (if any), and the beneficiary.
  • The LC gives assurance of payment, provided the terms are met.

Irrevocable credits balance the interests of both buyer and seller. The buyer gains a structured process for document verification, and the seller gains a firm payment guarantee.

Example

A buyer in Germany arranges an LC for a supplier in Vietnam. The LC is issued as “irrevocable.” Once the supplier ships the goods and submits correct documents, the issuing bank must pay. The buyer cannot change the LC terms or stop payment without the supplier’s written consent.

Benefits and Risks

For the exporter:

  • Strong payment protection.
  • Certainty that terms cannot change after shipment.

For the buyer:

  • Assurance that payment occurs only when all LC terms are met.
  • Improved credibility in international markets.

The main drawback for both parties is limited flexibility. Once the LC is issued, changes require mutual agreement, which can delay adjustments if trade conditions change.

Best Practice
  • Always verify that the LC clearly states “irrevocable.”
  • Review every amendment carefully and confirm acceptance in writing.
  • Keep copies of all communications with the issuing and advising banks.
Summary

Revocable credits allow unilateral change but provide little protection and are rarely used. Irrevocable credits are the global standard under UCP 600. They give exporters secure payment terms and buyers structured assurance of performance.