Red clause letter of credit

Under this type of L/C, the issuing bank agrees to advance part of the estimated sale proceeds of the cotton to be shipped, without remittance of the shipping documents. The balance is then paid once the shipping documents are presented. Obviously, the issuing bank and the buyer will issue strict directions as to how, when, by whom and under what circumstances funds may be drawn.

Conditions for the draw-down may include warehouse receipts as collateral (also referred to as green clause), advance payment guarantees and conclusion of an advance payment agreement. Depending on their assessment of the exporter’s reliability, the buyer’s bank or the buyer may decide to appoint someone to supervise the stocks on their behalf – such supervision is usually called collateral management.