red clause letter of credit

At sight irrevocable documentary credit No.XXX

Issued by XXX Bank DateXXX

Dear Beneficiary,

XXX Bank is pleased to issue this documentary credit to you for the specific goods described herein. This is an irrevocable credit, and it may not be modified or cancelled without the consent of all parties to this transaction.

The following are the conditions of this documentary credit:

1. The credit covers the payment for all goods you sell to the Beneficiary on or before the expiration date.

2. The Beneficiary must present the following documents to XXX Bank:

a) Commercial Invoice

b) Transport document (s)

c) Insurance contract

d) Packing list

e) Any other documents specified in the credit

3. All documents must be received by XXX Bank by the expiration date with discrepancies, if any, conforming to the terms and conditions of this credit.

4. Payment is to be made by draft drawn on XXX Bank at sight on or before the expiration date Deutschmark or in any other currency as specified herein or, must be released in due course.

5. Examination of documents specified herein by us must not exceed the period required by International Chamber of Commerce publication No.500-L/E and goods must be completely discharged within that period.

6. Any claims for non-conformance or quality will be subject to dispute resolution.

7. All freight, customs and other charges must be paid by the Beneficiary or as stated in the credit.

8. This credit is subject to the International Chamber of Commerce Uniform Customs and Practice, latest edition.

We, XXX Bank, hereby guarantee to honor drafts drawn in accordance with this credit, provided all information and documents abide by the strict terms and conditions of this credit.

We hope that this transaction will be mutually beneficial for all parties concerned.

Sincerely,

XXX Bank

Manager

Accounting Department

Letter of Credit (L/C) is a unique payment method used in international trade where payment is released to the supplier after fulfilling the contractual obligations. It is one of the financial instruments and safeguards provided to the seller to ensure their transactions.

A L/C may be an irrevocable document issued by a financial institution on behalf of a customer (buyer) and payable to the supplier (seller) of goods or services after the terms of sale have been accepted. The buyer makes payment to the issuer of the letter of credit before the seller ships the goods or provides the services. The issuing bank then pays the seller at the same time.

The most commonly used red clause letter of credit is a “red clause” L/C, which requires the seller to provide a loan to the buyer to complete the payment for the goods or services. The loan is advanced by the issuing bank and is repaid by the buyer. This type of L/C has some conditions, such as the amount of loan to be given, the interest rate and the duration of the loan.

In the letter of credit, the buyers financial position and creditworthiness are taken into consideration, and there is a greater degree of certainty that the buyer will be able to provide the funds required in a timely manner. It also gives both parties greater protection as all parties involved will officially agree on the details of the transaction and all relevant documents will be checked as part of the process, minimizing the change of unforeseen problems arising.

In a nutshell, a L/C is an excellent and secure payment method, particularly for international trade. This payment instrument provides both the buyer and supplier with assurances that the contractual obligations will be met without fail and ensures payment is made in a timely manner.