A Letter of Credit is a financial instrument issued by a bank on behalf of an importer (the buyer) to guarantee payment to an exporter (the seller) for the goods or services delivered. It acts as a commitment by the bank to make the payment upon the fulfilment of specified conditions.
A letter of Credit is a contractual obligation by the importer’s bank to pay after the goods are shipped and required documents are presented by the exporter to its bank as proof. Letters of Credit are considered as a trade finance tool to guard both exporters and importers.
An unconfirmed LC means that the bank issuing it is only accountable for payment. Hence, revocable, and unconfirmed LCs are way cheaper and more flexible for buyers.
Commonly, irrevocable, and confirmed LCs are preferred for sellers to be more secure.
To avoid risk in the collection of payments from the importers in the foreign country the letter of credit is needed by the exporter to assure against the non-payment of dues by the importer.
Without giving prior notice or without consent of the beneficiary a revocable letter of credit can be cancelled or amended by the issuing bank at any time.