What is the difference between an irrevocable LC and a revocable LC?

• A. Irrevocable LC can be amended or canceled by the issuer; revocable LC cannot be canceled.
• B. Irrevocable LC cannot be canceled without the beneficiary's consent; revocable LC can be amended or canceled by the issuer.
• C. Both types cannot be canceled once issued.
• D. Irrevocable LC is always revocable.

Answer: (B)

The difference hinges on how binding the bank’s promise is to the beneficiary. An irrevocable letter of credit is a committed undertaking: the issuing bank must honor the beneficiary if the required documents are presented, and the terms cannot be changed or the obligation canceled without the beneficiary’s consent. A revocable letter of credit, however, can be amended or canceled by the issuing bank at any time and without the beneficiary’s agreement, which means the beneficiary has far less protection. That’s why the correct understanding is that an irrevocable LC cannot be canceled without the beneficiary’s consent, while a revocable LC can be amended or canceled by the issuer. In practice, irrevocable LCs are far more common because they provide stronger assurance to the seller.