📝 Red Clause
US Capital Private Bank Knowledge Base
Definition:
A Red Clause is a special provision within a letter of credit that authorizes the advising or negotiating bank to make an advance payment to the beneficiary before the presentation of shipping documents. This advance is typically made against a simple receipt or written promise.
Purpose:
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To provide the beneficiary (usually the seller or exporter) with early funds to finance production, purchase of goods, or shipment expenses.
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Helps improve the cash flow of the beneficiary before the final payment is made.
How it works:
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The beneficiary requests the advance under the Red Clause.
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The advising or negotiating bank releases funds as per the terms of the clause.
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The beneficiary later submits the required shipping documents to receive the remaining payment.
Risks and Considerations:
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The bank takes on some risk by releasing funds before verifying shipment.
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Usually used when trust exists between parties, or when the bank is confident in the beneficiary's performance.
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