Red Clause Letter of Credit

A red clause letter of credit can sound intimidating. A red clause letter of credit is a provision that is usually typed or written in red ink. It allows the seller to utilize a fixed amount of money before authorized documents are furnished. The red clause letter stemmed from fur trading and wool trade with China and Australia, respectively. The red clause letter of credit is used generally to help expedite international exports and trade.

How It Works

In present day situations, the red clause letter of credit is utilized between two parties with an established and secure working relationship. The state of the working relationship is very important to extending the red clause letter of credit. The reason why that is the buyer is extending an unsecured loan to the seller and exposing themselves to financial risk. If the seller decides to back out of the agreement, then the buyer is at a loss on the merchandise. In order to recoup the advanced loan, the seller deducts the amount from the amount of credit when payment is due.

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