Letters of credit

A revocable letter of credit is uncommon because it can be changed or cancelled by the bank that issued it at any time and for any reason.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.

A confirmed letter of credit is one to which a second bank, usually in the exporter's country adds its own undertaking that payment will be made. This is used when the exporter does not find the security of an unconfirmed credit sufficient due to issuing bank risk or political and/or economic risk associated with the importer's country.

An irrevocable and confirmed letter of credit has not only the commitment of the issuing bank but also a binding undertaking given by the confirming bank to pay when the documents are presented in accordance with the terms and conditions of the credit. So a confirmed letter of credit provides more security than an unconfirmed one.

An unconfirmed letter of credit is one which has not been guaranteed or confirmed by any bank other than the bank that opened it. The advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part but confirming authenticity.

A transferable letter of credit can be passed from one 'beneficiary' (person receiving payment) to others. They're commonly used when intermediaries are involved in a transaction.