Legal Definitions - irrevocable letter of credit

Definition: An irrevocableletter of credit is a financial instrument issued by a bank that guarantees payment to a seller on behalf of a buyer. Once the letter of credit is issued, it cannot be cancelled or changed without the agreement of all parties involved.

Example: A company in the United States wants to purchase goods from a supplier in China. The supplier requires payment before shipping the goods, but the buyer is hesitant to send money without any guarantee that the goods will be delivered. To solve this problem, the buyer can request an irrevocable letter of credit from their bank, which guarantees payment to the supplier once the goods are shipped. This gives the supplier confidence that they will be paid, and the buyer confidence that they will receive the goods they paid for.

This example illustrates how an irrevocable letter of credit can be used to facilitate international trade by providing a secure payment method for both the buyer and the seller.