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What is an irrevocable confirmed letter of credit?

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Quick Answer

An irrevocable letter of credit is used by banks to guarantee a buyer’s contractual obligations to a seller. It is a financial instrument that allows institutions and individuals to conduct business with confidence.

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Full Answer

The letter is regarded as irrevocable because it cannot be amended unless all parties agree to the stipulations. These financial instruments are typically used by banks to facilitate international trade and mitigate the inherent risks associated. The irrevocable letter of credit eliminates the seller’s credit risk by guaranteeing the seller payment from the buyer’s bank if the buyer fails to pay the seller. The details of each letter of credit are not as critical as the concept of the underlying guarantee. The document provides protection against an assortment of risks, including failure to pay, failure to finish the associated project or failure to perform the underlying obligation.

An irrevocable letter of credit is a firm commitment from an issuing bank to pay an accepting bank a defined sum of money in a specified currency, provided the conditions outlined in the letter of credit are satisfied within a specified time period. The associated letter of credit cannot be canceled without the beneficiary’s prior approval. Similar to other forms of bank correspondence, an irrevocable letter of credit is transferred and affirmed through SWIFT.

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