Red clause letter of credit

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-06

// THE SHORT ANSWER

A red clause letter of credit lets the exporter draw an advance, part of the credit's value, before it ships, usually against a simple receipt and an undertaking to ship and present the documents. It funds a supplier who needs cash to buy or produce the goods, often a commodity or seasonal producer. The advance is made by the advising or nominated bank, which the issuing bank must repay if the exporter fails to ship, and the issuing bank then looks to the importer, so the importer is in effect lending to its supplier unsecured. A green clause variant requires evidence that the goods are in storage.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.