Red clause L/C is a special payment instrument, which is used to finance the seller (the beneficiary). In which, the issuing bank or the nominated bank advances a certain percentage of the total value of the L/C to the beneficiary.
Previously, red clause L/Cs were used in some countries in certain industries such as wool or cotton trade, where the sellers needed pre-shipment finances to buy the goods.
Nowadays, this instrument is used in some industries where the buyers’ position is lower than that of the sellers; or the buyers, in view of the relationship, want to support the sellers with advances.
Get advances to buy materials and produce goods;
Ensure that the produced goods have already been sold.
Maintain good relationship with the seller;
Enhance competitiveness in the market where the seller has dominant position.