A Letter of Credit (Irrevocable) is a written commitment from a financial institution, such as a bank, stating that the issuer will honor a specific payment obligation when it is due. The payment is made by the financial institution on behalf of the buyer (applicant) to the seller (beneficiary) of the goods or services. The letter of credit is an irrevocable guarantee, meaning it cannot be modified or cancelled without the mutual consent of all parties involved in the transaction. The main purpose of the letter of credit is to guarantee payment to the seller in the event that the buyer does not fulfill their obligation. This eliminates the risk of non-payment for the seller, and provides assurance to the buyer that the goods or services will be provided as agreed. There are many types of irrevocable letters of credit. Standby letters of credit are commonly used for commercial transactions, performance bonds, and payment guarantees. Financial institutions can also issue letters of credit to increase the creditworthiness of a buyer. Revolving letters of credit can be used to cover the cost of multiple shipments over a period of time. Sight drafts are commonly used to pay for goods that have already been delivered. Lastly, back-to-back letters of credit are used to make payments to a third party on behalf of the buyer.
A Letter of Credit (Irrevocable) is a written commitment from a financial institution, such as a bank, stating that the issuer will honor a specific payment obligation when it is due. The payment is made by the financial institution on behalf of the buyer (applicant) to the seller (beneficiary) of the goods or services. The letter of credit is an irrevocable guarantee, meaning it cannot be modified or cancelled without the mutual consent of all parties involved in the transaction. The main purpose of the letter of credit is to guarantee payment to the seller in the event that the buyer does not fulfill their obligation. This eliminates the risk of non-payment for the seller, and provides assurance to the buyer that the goods or services will be provided as agreed. There are many types of irrevocable letters of credit. Standby letters of credit are commonly used for commercial transactions, performance bonds, and payment guarantees. Financial institutions can also issue letters of credit to increase the creditworthiness of a buyer. Revolving letters of credit can be used to cover the cost of multiple shipments over a period of time. Sight drafts are commonly used to pay for goods that have already been delivered. Lastly, back-to-back letters of credit are used to make payments to a third party on behalf of the buyer.
