Sample Letter Of Credit Clause. Letter of Credit, as being defined by Investopedia, is widely used for international exchanges as guarantees as well as an important assurance, particularly to the sellers that will be be paid for a large transaction. The main intent of red clause letter of credit is to provide finance to the seller for his working capital needs.
Beneficiaries of red clause letters of credit are invariably brokers/agents of buyers in a particular field.
Under the red clause letter of credit, the exporter can get advance money from the negotiating bank.
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Letters of credit
A transferable letter of credit allows the beneficiary to act as a middleman and transfer his rights under a letter of credit to another party or parties who may be suppliers of the goods. To lessen the credit risk of goods bought, the buyer uses a payment mechanism generally in case of the international trading which gives an economic guarantee to the exporter for guaranteed amount of payment by the issuer's bank in case the actual buyer defaults which is known as letter of credit. Such letters of credit contain a clause which enables the beneficiary to avail of an advance before effecting shipment to the extent stated in the LC.