International Trade Payment

INTERNATIONAL TRADE PAYMENT

I. PARTICIPANTS:

Parties involved: importer, exporter, issuing /paying bank, advising/confirming bank.

II. CHARACTERISTICS:

1. Definition:

RED CLAUSE L/C (Advance Clause / Special Clause): L/C whereby Issuing Bank allow Advising Bank to advance Beneficiary in order to buy goods and materials for producing goods of the issued L/C. It's called "Red Clause L/C" because it was printed in red ink before.

2. Characteristics:

- Applicant undertakes financing for Beneficiary when L/C is issued.

- The advanced amount is from Applicant's account

-> Commercial Credit, not Credit of Issuing Bank or Advising Bank.

- Advising Bank carries out procedures according to the L/C terms without undertaking or responsibility for the advanced amount.

- Issuing Bank authorizes Advising Bank to conduct the Advancing. After that (before that) Issuing Bank will (did) debit Applicant's account to reimburse (transfer to) Advising Bank.

- Issuing Bank advances a fixed amount of the L/C when receiving documents, usually: B/E of advance, invoice, debenture or guarantee of delivery

3. Advantages:

a. Beneficiary:

- Get money for preparing exports

- Decrease financial difficulty

- Have a stable export market

b. Applicant

- Get lower prices of goods

- Have a stable import source, even when world prices fluctuate

c. Banks:

Issuing Bank provide the Advance when receiving order of claiming advance from Beneficiary, in which Advising Bank certifies that draft of claiming advance and the L/C conditions are suited.

OR

Issuing Bank authorizes Advising Bank/Negotiating Bank to advance according to the red clause. The Advance and Interest will be reimbursed by Issuing Bank or deducted from Beneficiary's invoice.

This advancing of Advising Bank = a loan for advancing money of exports that commercial banks usually give, but with guarantee of reimbursement from Issuing Bank if Beneficiary breaks the contract.

Disadvantages:

4. Disadvantages: Applicant's under costs and risks of advancing

III. PROCESS OF RED CLAUSE L/C

1. Importer and exporter sign a sales contract, payment by Red clause L/C

2. Importer instructs his bank to open a letter of credit in favor of the beneficiary

3. Issuing bank issues and presents the L/C to exporter's bank (advising bank); authorize advising bank to advance money to beneficiary

4. Advising bank advises