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. Under this letter of credit, the issuing bank will make an advance payment to the exporter i.e. the seller before the seller ships the goods to the importer i.e. buyer.
In this letter, the clause is printed or typed in red ink, therefore, it is known as red clause letter of credit.
WORKING OF RED CLAUSE LETTER OF CREDIT
The funds provided in a red clause letter of credit are known as advances. The buyer adds the “red clause” allowing the bank to issue advance or credit to the seller. These advances are then deducted from the face amount of the credit when it is presented for payment.
The availability of the advance depends on the approval of the buyer. The buyer approves for a certain portion or percentage of the total face value of the Letter of Credit as an advance.
These advances are then used by the seller to meet the working capital requirements such as raw material purchases.
GREEN CLAUSE LETTER OF CREDIT
In a green clause letter of credit, in addition to pre-shipment finance, storage facilities are allowed at the port of shipment to the exporter by opening bank.
In this type of letter, the clause is typed or printed in green ink, therefore it is known as Green Clause letter of credit. It authorizes advances to the beneficiary on secured basis i.e. against pledge of the goods.
These unique Letters also require a greater amount of documentation. In addition, the bank that is issuing the Letter requires title documents in order to advance any payments. These documents are typically proof of warehouse status.
DIFFERENCE BETWEEN RED LETTER & GREEN LETTER OF CREDIT
|BASIS||RED LETTER OF CREDIT||GREEN LETTER OF CREDIT|
|DOCUMENTATION||Only a written undertaking is required||An additional document of title is also required.|
|PERCENTAGE OF ADVANCE||20% to 25% to the face value of letter of credit.||75% to 80% to the face value of letter of credit.|
|SECURITY||It is less secure as compared to green letter.||It is more secure|
Thus, a Green clause letter of credit is an extension of red letter that is commonly used in the transactions associated with the commodity markets such as rice, gold, wheat, etc.