Red Clause Letter Of Credit
Red clause letter of credit gives the opportunity to an exporter to obtain pre-shipment finance. This type of L/C was first introduced on the back of the Australian Wool Trade. At that time the exporter of wool was able to draw money to purchase wool and the clause stated was red. However, at present, the advantages that were associated with red clause letter of credit are usually canceled out by the request of an Advance Payment Guarantee.
How Does Red Clause L/C work:
The importer will give an instruction to the advising bank for a percentage of credit prior to shipments. The credit of percentage usually is around 20-25% of the L/C value. The credit amount commonly provides in local currency and will be against security from the exporter. Funds will be adjusted when documents are presented and goods are shipped. Interest and fees will be charged against sanctioned credit. However, Clause of Red Clause L/C is typed or printed in Red ink.
Green Clause Letter Of Credit
Green Clause Letter Of Credit is the extended form of Red Clause Letter Of Credit. It provides credit facility to the exporter not only for the purchase of raw materials, processing, and packaging goods etc. but also pre-shipment warehousing at the port of origin and insurance expenses. Normally credit is sanctioned when the purchased goods are stored in bonded warehouses. This type LC usually used in the transactions relating to commodity market like wheat, rice, gold etc.
In red clause LC, the percentage of advance would be 20% to 25% of the face value of LC, where green clause LC percentage would be up to 75% to 80% of the face value of LC. Green Clause LC is called Green because these clauses are written in Green Ink.
Example of Green Clause LC:
IHL from Bangladesh is buying rice worth $ 50,000 from China Rice Ltd, a reputed china rice exporting company. China Rice Ltd requests to IHL Bangladesh to issue a Green Clause LC with an advance payment $ 25,000 (50% of LC Value). IHL Bangladesh agrees and applies for green clause LC with its Bank – Dutch Bangla Bank Ltd (DBBL).
Importer/Buyer = IHL Bangladesh,
Exporter/Seller = China Rice Ltd,
Green Clause issuing Bank = DBBL and
Advising Bank = Bank of China.