Red Clause

Definition

Red Clause. It is a clause (originally typed in red) added to a letter of credit authorizing the advising/negotiating financial institution to make an advance payment to the beneficiary (vendor) before the actual shipment to the buyer. The advance may be up to 100 percent of the export contract value and may be used by the vendor to purchase the inputs or the activities necessary for manufacturing or shipping the products. The red clause credits are used primarily when the buyer has an agent in the exporting country. To finance its purchases, the buyer may arrange for the opening of a red clause letter of credit. Negotiations of red clause credits are limited to the financial institution making the advances to assure that revenues from the shipment are used to repay the advances made.