Irrevocable letter of credit

An irrevocable letter of credit (ILOC) is an official correspondence from a bank that guarantees payment for goods or services being purchased by the individual or entity, referred to the applicant, that requests the letter of credit from an issuing bank. An irrevocable letter of credit cannot be canceled, nor in any way modified, except with the explicit agreement of all parties involved: the buyer, the seller, and the issuing bank. For example, the issuing bank does not have the authority by itself to change any of the terms of an ILOC once it is issued. ILOCs are most commonly used to facilitate international trade. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. Although an ILOC is irrevocable while it is in force, generally the time period during which a proposed transaction is expected to be completed, an ILOC expires at a specified point in time, which is noted in the letter of credit.

An irrevocable letter of credit is a financial instrument used by banks to guarantee a buyer's obligations to a seller. It is irrevocable because the letter of credit cannot be modified unless all parties agree to the modifications.