What Is a Red Clause Letter Of Credit?

A Red Clause Letter of Credit is a specific type of letter of credit in which a buyer extends an unsecured loan to a seller. Red Clause Letters of Credit permit documentary credit beneficiaries to receive funds for any merchandise outlined in the letter of credit. These letters are commonly used by beneficiaries who act as purchasing agents for buyers in another country.

Red Clause Letter Of Credit Explained

The funds provided in a Red Clause Letter of Credit are known as advances. These advances are then deducted from the face amount of the credit when it is presented for payment. Red Clause Letters are usually employed to facilitate international exports and trade.

A Red Clause Letter of Credit allows for an exporter to obtain pre-shipment finance, although available credit is usually only part of the estimated value. It could even be the entire sales value. A buyer can expand their supply sources with a Red Clause Letter of Credit. Most buyers shy away from becoming involved in financing goods that have not yet been shipped, but exporter and buyer may be linked together through a normal contract with the trade bank establishing the red clause letter of credit against a registered contract with an approved buyer.

Interestingly, when using this specialized form of credit, the clause is printed or typed in red ink. In contrast, under a Green Clause Letter of Credit, in addition to pre-shipment finance, storage facilities are allowed at the port of shipment to the exporter. The clause is typed or printed in green ink.