Irrevocable letter of credit is a method of payment in export-import trade. It’s universally accepted that an irrevocable letter of credit is the safest means of payment in the international trade as it safeguards the interest of the buyer and the seller. It works like this:
Importer A want to buy goods from exporter B. Importer A will ask exporter B to send him a Proforma invoice for the goods ordered. Importer A will ask his banks to raise an irrevocable letter of credit in favor of exporter B as detailed in the Proforma invoice provided. Importer A’s bankers will in essence be guaranteeing to the bankers of exporter B that funds are available to pay for the goods. Upon receipt of instructions, exporter B’s bankers will call on exporter B to ship the goods to Importer A. Upon sending the goods, exporter B will take the goods clearing documents aka shipping documents, waybill/bill of landing, to his bankers. Exporter B’s bankers will in return send the shipping documents to Importer A’s bankers to forward to Importer A so that he can be able to clear the goods from Customs. It’s after this that Importer A’s bankers alerts exporter B bankers to release the funds to exporter B. This way, Importer A and exporter B are safeguarded from either one of them coning the other. The transaction fees to the banks are about 2% of the value of the goods.
It’s called irrevocable L/C or ILC because once initiated, the transaction can not be revoked.