Red/Green-clause letter of credits: Documentary Credits

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Features
The so-called red clause – formerly written in red ink, hence the name – might read as follows: “This red clause documentary credit allows an advance payment of USD 100,000 against presentation of:
*beneficiary's simple receipt and
*beneficiary's written undertaking to present the shipping documents within the credit validity.”

The advantage
As an exporter you benefit from advance payment, which you will generally receive against presentation of a receipt and an undertaking to present the dispatch documents within the period of validity.

The disadvantage
As the importer, the risks are considerable: you are acting as creditor to the exporter, but there is no guarantee that he will submit the dispatch documents stipulated in the documentary credit.

Recommendation
A red-clause credit should only be entered into if there is a close working relationship based on mutual trust between the importer and exporter.