Red Clause credit Letter

Red clause credit letters are written to allow the seller to draw up to a certain amount of the total shipping charges including the cost of the goods to be delivered in advance, from the buyer's bank account. Usually, when executing a red clause in business transactions, there is no need for the seller to prepare any further documental evidence to be submitted to the buyer in order to draw a sum of charges in advance for the shipment yet to be delivered.

Normally red clause letters come into effect when the buyer and seller have an understanding working relationship because apparently, the buyer is subject to extending an unsecured loan to the seller without any prescribed documents. In this case, the issuing bank becomes liable for the sum of charges withdrawn in advance and if the goods are not delivered or the loan not repaid, the issuing bank becomes responsible to chase the seller for collections. The applicant has the privilege to request a copy of contract of carriage or maybe similar evidence related to the shipment of goods.

Red clause credit letters are quite rare these days; however they are used in the following trades to help dealers in the commerce sector by providing them pre-shipment finance -

• Wool and fur
• Fishing
• Wood and timber
• Coffee

These letters were extensively used for wool trade in Australia and fur trade in China a few years ago.

The name originates from the fact that the letter is written in red ink which indicates the high risk involved in the trade. People tend to confuse these letters with green clause credit letters. The only difference between red clause and a green clause trade is that in the latter, an advance payment is only made once the buyer receives a written commitment from the exporter, to deliver the goods within the specified date agreed by both parties involved in the trade.

Refer to the sample red clause letter of credit to get a clear idea of how to write one:

Bank Of America
424 Pine Street
Highlands, NC 28741
(828) 579-3964

Ref No: 145/RC-005

Date of Issue - October 14, 2011
Date of Expiry - November 13th 2011
To (Beneficiary)
Mr. Ronald Smith - Executive Director
Franklin textiles
465 Main Street
Highlands, NC 28741

Dear Mr. Smith,

This is to inform you that upon request of our client, Acorns Designers, we hereby provide you a red clause letter of credit in the favor of Acorns Designers for an amount of $14000. We are under the financial support of Bank of America, Highlands, NC.

You need to present this letter in order to withdraw the agreed amount on or before the date of expiry of this letter.

Your requirement is certainly honored and we expect you to follow the terms and conditions of the clause as well as our company and deliver the shipment as per our agreement.

Sincere regards,

Jonathan Sheen

Also, you can refer to Credit Deletion Letter and Credit Dispute Letter for sample letters.