International Trade Payment
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INTERNATIONAL TRADE PAYMENT
PARTICIPANTS:
Parties involved: importer, exporter, issuing /paying bank, advising/confirming bank.
CHARACTERISTICS:
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. Its called “Red Clause L/C” because it was printed in red ink before.
Characteristics:
Applicant undertakes financing for Beneficiary when L/C is issued.
The advanced amount is from Applicants 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 Applicants 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
Advantages:
Beneficiary:
Get money for preparing exports
Decrease financial difficulty
Have a stable export market
Applicant
Get lower prices of goods
Have a stable import source, even when world prices fluctuate
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.
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 Beneficiarys 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:
Disadvantages: Applicants under costs and risks of advancing
PROCESS OF RED CLAUSE L/C
Importer and exporter sign a sales contract, payment by Red clause L/C
Importer instructs his bank to open a letter of credit in favor of the beneficiary
Issuing bank issues and presents the L/C to exporters bank (advising bank); authorize advising bank to advance money to beneficiary
Advising bank advises