Red clause letter of credit
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A letter of credit with a special clause that lets the exporter draw part of the money before shipping, to make or buy the goods.
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01 · In plain words
A red clause lets the exporter take part of the LC money before shipping, to make or buy the goods
A is a bank's promise to pay the exporter when the exporter hands in documents that match its terms. A , or red clause LC, adds one special clause. It lets the exporter get an advance, that is, part of the money early. The exporter uses the advance to make or buy the goods (World Bank Glossary of Finance and Debt).
So the exporter can draw money before it ships the goods and before it hands in the shipping documents (ICC Academy). This is a form of : money paid to the exporter before the goods leave (Global Supply Chain Finance Forum). The name comes from the red ink once used to make the clause stand out (World Bank Glossary).
A bank in the exporter's country pays the advance. The buyer's bank, called the issuing bank, is responsible for it (World Bank Glossary). In plain words, the exporter gets money early, and the buyer's bank stands behind it.
Who is involved
- The importer, called the , asks its bank for the red clause LC.
- The exporter, called the , receives the advance and later the rest of the money.
- The importer's bank, the , opens the LC and carries the liability for the advance.
- A bank in the exporter's country, the correspondent bank, pays the advance. means one bank providing services to another.
02 · How it works
Seven steps take the exporter from an early advance to the final payment
Figure 1 · Interactive
A red clause LC, step by step
Read down the steps. The advance comes at step 4, before the goods ship.
Sources: World Bank Glossary of Finance and Debt, via UN ESCWA (the advance and who carries it); ICC Academy, October 2024 (drawing before shipment); Czech Banking Association (papers for the advance). Steps 1, 2, 5, 6 and 7 follow the general letter of credit flow.
03 · What it means for you
The exporter gets cash before shipping, and the importer's bank carries the advance
Figure 2 · Interactive
What a red clause LC means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million red clause LC with a 20% advance, the exporter gets $200,000 before shipping
This example uses round, made-up numbers. The LC is for $1,000,000. The red clause allows an advance of 20%. Interest on the advance is 5.00% a year, for 60 days from the advance to the presentation of documents. Interest is counted on a 360-day year, the US money market . Real terms vary by bank, country and deal.
Figure 3 · Illustrative
A 20% advance on a $1,000,000 red clause LC
Illustrative inputs. The payment at presentation is highlighted.
Made-up rates, worked out by our checking script (05_worked_examples/cards/red-clause-lc.py). Day count basis: Alternative Reference Rates Committee and Federal Reserve H.15. Your bank's terms will differ.
05 · When to use it
A red clause LC suits an exporter who needs money to make or buy the goods before shipping
Good fit when
- As the exporter, you need money to make or buy the goods before you ship (World Bank Glossary).
- As the importer, you are ready to fund your supplier early through your bank, and your bank carries the advance (World Bank Glossary).
- You both agree on what the exporter hands in for the advance, such as warehouse receipts under a secured red clause (ICC Academy).
Another tool may suit better when
- As the importer, you cannot accept paying before goods exist. Under a clean red clause, no proof of goods is needed (ICC Academy). Look at a sight letter of credit, which pays after shipment.
- You want the goods held as security. Ask for a secured red clause or a green clause, where the goods are stored in the bank's name (ICC Academy).
- The exporter needs funds before shipping but the buyer will not open an LC. Other forms of pre-shipment finance include pre-export finance and purchase order finance.
06 · Rules and a real case
A red clause LC follows the ICC rules it names, and the advance terms sit in the LC itself
When an LC says it follows , those ICC rules apply. The ICC approved them on October 25, 2006, and they have been in force since July 1, 2007 (ICC). The red clause sets out the terms of the advance. So read the red clause closely before you agree to it.
The ICC Banking Commission's 2026 to 2027 plan focuses on clarifying and explaining the current rules, with no new version of UCP 600 (ICC Digital Library, July 31, 2026).
A real-world reference. In its Standard Definitions for pre-shipment finance, published in 2016, the Global Supply Chain Finance Forum lists finance against red and green clause letters of credit as forms of pre-shipment finance. The Forum brings together ICC, BAFT, EBA, FCI and ITFA (Global Supply Chain Finance Forum).
Summary
A red clause LC gets the exporter part of the money before shipping, backed by the buyer's bank
The exporter draws an advance before shipping and uses it to make or buy the goods. The rest is paid once the documents match the LC, less the advance and any agreed interest. The importer's bank carries the advance. An importer who wants security can ask for a secured red clause or a green clause.
Related guides: Letters of credit; Pre-shipment vs post-shipment finance; Pre-export finance. Related cards: Letter of credit (sight); Pre-export finance; Purchase order finance. Every term is in the Trade Finance Glossary.
Sources
- World Bank Glossary of Finance and Debt, via UN ESCWA, Red clause, undated. Supports: definition, the advance from the correspondent bank, the issuing bank's liability, the name
- ICC Academy, Types of documentary credit: a comprehensive guide, October 21, 2024. Supports: drawing before shipment, clean and secured red clauses, the green clause
- Czech Banking Association, Red clause L/C, undated. Supports: papers handed in for the advance
- Global Supply Chain Finance Forum, Standard Definitions for Techniques of Supply Chain Finance: Pre-shipment Finance, 2016. Supports: red and green clause LCs as forms of pre-shipment finance
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, undated. Supports: the rules an LC can follow; current ICC product
- International Chamber of Commerce, ICC's new rules on documentary credits now available, December 4, 2006. Supports: UCP 600 approval date and in-force date of July 1, 2007
- ICC Digital Library, ICC Banking Commission 2026-27 Action Plan next steps, July 31, 2026. Supports: the 2026 to 2027 plan
- Alternative Reference Rates Committee, SOFR "In Arrears" Conventions for Syndicated Business Loans, July 22, 2020. Supports: Actual/360 day count in the worked example
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: 360-day year in the worked example
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