10.9.2-RISK AND THE RELATION TO TRADE CREDIT-ADVANCE CREDIT - RED CLAUSE LETTER OF CREDIT
Advance credit - red clause letter of credit
This is a combination of documentary and open credit in that it provides unsecured credit to an exporter against an agreed transaction. Under this type of L/C the issuing bank agrees to advance part of the estimated sales proceeds of the coffee to be shipped, without tender of the shipping documents. The balance is then paid once the shipping documents are presented. If a 'green clause' is included as well then the exporter can obtain additional advances upon submission of warehouse receipts as collateral. Obviously the issuing bank will issue strict directions to the correspondent bank in the exporter's country as to how, when, by whom and under what circumstances funds may be drawn. (The correspondent bank is a bank with which the issuing bank has an established relationship.)
A red clause letter of credit allows an exporter to obtain pre-shipment finance, although the amount of available credit is usually only part of the estimated value or even the sales value. This is one way for a buyer to expand their sources of supply. Most buyers are reluctant to become 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 L/C against a registered contract with an approved buyer.
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