Question

Smart exporters insist on irrevocable letters of credit. Why? Provide examples.

Answer 1

First of all we need to know what is letter of credit in export import business. A letter of credit is written commitment by a bank issued after request by an importer that payment will be made to the beneficiary i.e exporter provided all the terms and conditions met as in letter of credit. Here the export letters of credit carry the all credit risk by the issuing bank. The smart exporters use this and insist in irrevocable letters of credit where this letters of credit can not be cancelled or changed without consent of all parties involved (importer, exporter and issuing bank). The risk is mitigated via letter of credit. The smart exporter insist on it because there is no possibility cancellation without all parties. So the exporter get a benefit here about the surity of the export. For example a motor company is exporting a car to a foreign national then the importer issuing a letter of credit with that bank and this irrevocable letters of credit the importer can not cancel so exporter almost get a guarantee that the payment will be made after meeting the fulfillment. Similarly a electronics company say Sony providing electronic goods to USA then the importer in the US can not cancel the commitment as it is irrevocable.