Payment Terms

 𝐀 𝐥𝐞𝐭𝐭𝐞𝐫 𝐨𝐟 𝐜𝐫𝐞𝐝𝐢𝐭 𝐭𝐡𝐚𝐭 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐬 𝐚 𝐜𝐥𝐚𝐮𝐬𝐞 (𝐭𝐫𝐚𝐝𝐢𝐭𝐢𝐨𝐧𝐚𝐥𝐥𝐲 𝐩𝐫𝐢𝐧𝐭𝐞𝐝 𝐢𝐧 𝐫𝐞𝐝) 𝐚𝐮𝐭𝐡𝐨𝐫𝐢𝐳𝐢𝐧𝐠 𝐭𝐡𝐞 𝐧𝐨𝐦𝐢𝐧𝐚𝐭𝐞𝐝 𝐛𝐚𝐧𝐤 𝐭𝐨 𝐦𝐚𝐤𝐞 𝐚𝐝𝐯𝐚𝐧𝐜𝐞𝐬 𝐭𝐨 𝐭𝐡𝐞 𝐬𝐞𝐥𝐥𝐞𝐫 𝐛𝐞𝐟𝐨𝐫𝐞 𝐬𝐡𝐢𝐩𝐦𝐞𝐧𝐭/𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐝𝐨𝐜𝐮𝐦𝐞𝐧𝐭𝐬. 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 the 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.