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Advance Payment ( Red Clause) Credits
If a sales contract would involve an exporter in heavy investment (e.g. in buying in goods, materials or special equipment) he might ask the buyer for part-payment in advance. When the buyer’s bank sets up the  Credit in the exporter’s favour, it can include a specific clause that authorises payment of such a cash advance: this is a “red clause” (so named because it used to be typed in red to make it stand out).

 The advance will be due for repayment when the required documents are presented and the Credit proper is payable; at that point, part of the proceeds will be used to repay the advance and the balance will be paid to the exporter.

When the advance payment is made, the Issuing Bank may require a receipt signed by the exporter together with an undertaking to utilise funds to manufacture or purchase goods for export. In some cases, the Issuing Bank may require goods purchased with the advance to be warehoused in the bank’s name to provide security for the money advanced.

Revolving Credits

Once exporters and customers have built up on-going business and a relationship of trust, they may wish to avoid opening a new Credit (or amending an existing Credit) for each new shipment. Revolving Credits will allow shipments to continue without repeatedly incurring the costs (in bank charges and administration) of opening or amending Credits. The revolving nature of the Credit, and the reinstatement of the amounts of Credit used up, will depend either on time or on value.

A revolving Credit based on time might, for example, allow an exporter to ship £100,000 each month for a period of six months. The maximum drawings might be specifically stated as being £600,000. The exporter can accordingly ship £100,000 worth of goods each month and expect to be paid for each shipment each month until he reaches the total value of the Credit in the sixth month. The Credit might also state that amounts not drawn in a particular month are to be cancelled (non-cumulative) or that they can be carried forward (cumulative).

  • In a non-cumulative arrangement, if the exporter does not ship in any particular month, he forfeits the right to be paid for that month; and if he makes no shipments for five months, the most he can draw in the sixth month is £100,000.
  • In a cumulative arrangement, however, the exporter can ship nothing for five months and then ship £600,000 worth of goods in the sixth month. He is entitled to draw £600,000 for them.

A revolving Credit based on value entitles the exporter to draw the value of his shipment each time he ships goods. The Credit is immediately reinstated by the value of the shipment made. This creates an open-ended liability for both the Issuing Bank and the buyer, so the terms of the Credit would normally provide both for a maximum amount to be drawn in total and for a maximum amount at each drawing. Many exporters that have long-established customers prefer revolving Credits.

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Evergreen Credits

Sourcing the goods required for an export sale may involve the exporter in making long-term arrangements (e.g. two or three years) with his own suppliers or with manufacturers. Such arrangements require the exporter to commit himself financially or in other ways, so that he may want some assurance of his customer’s long-term commitment. The exporter may therefore ask the buyer to include in his Credit a clause stating that the Credit is renewed automatically each year, unless notice of cancellation or amendment has been given well in advance of expiry.

The long notice period should give the exporter enough time to unwind his own obligations to suppliers and manufacturers in an orderly manner.

Credits that contain such automatic renewal clauses are essentially available without a break, and are appropriately known as “Evergreen Credits”.

Standby Credits

An exporter and his customer may arrange that goods will be paid for in an agreed manner after they have been despatched. However, if payment in the agreed manner is not forthcoming, the exporter will need another way of getting paid. A standby Credit can provide this security backup.

The buyer’s bank issues the standby Credit, under which the exporter can claim for the amount unpaid simply by (for example) submitting a certificate stating the value of shipments made in respect of which no payment has been received from the buyer. Since the standby Credit becomes active only if the buyer fails to perform his obligations, the paperwork required to draw on a standby Credit is minimal. In the event that the customer does not pay, therefore, standby Credits provide the exporter with security similar to a bank guarantee. In some marketplaces (e.g. the USA), they are preferred to bank guarantees.

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Clean Credits

A clean Credit is one under which the Issuing Bank:

  •  Requires only a bill of exchange to be drawn, as instructed in the Credit, and
  •  Undertakes to pay such a bill upon presentation.

There is no requirement for any other document to be presented in support of the bill of exchange.

The exporter can use clean Credits in a manner very similar to standby Credits.

Credits financed by international agencies

Credits set up under aid agreements and financed by established international agencies do offer the exporter security of eventual payment. However:

  •  The terms and conditions of such Credits and the paperwork involved could be daunting
  •  There may be delays in obtaining payment or even answers to queries because agency procedures need to be followed. Though the procedures are clearly laid out, the process can sometimes be both tedious and disheartening.

Inoperative Credits

The exporter may sometimes be faced with a Credit that contains stipulations, terms and conditions that he can neither control nor meet independently (e.g. stipulated documents are to be issued by the buyer, the terms may require receipt of the proceeds of a back-to-back Credit, or payment may be made conditional on the satisfactory inspection of goods in the buyer’s country).

Credits that contain terms or conditions that in their nature are outside the exporter’s control preclude him from complying independently with the Credit, so that the Credit is not an independent instrument of payment and may be termed an inoperative Credit. The exporter should be very wary of accepting such a Credit. If he is forced (by business circumstances) to accept one, he should seek independent financial and legal advice before shipment.

Payment under Credits

The general principle of documentary Credit operations is:

  •  Both the Issuing Bank and the Confirming Bank pay without recourse to the exporter in respect of documents presented to them that comply with the terms of the Credit, but
  • All other banks pay the exporter with recourse.

All Credits must clearly indicate whether they are available by:

  •  Sight payment, or
  •  Deferred payment

and by:

  •  Acceptance, or
  •  Negotiation.

Occasionally, there may be Credits of which a portion is available by sight payment and a portion is payable on deferred payment or other terms.

Credits may be available for settlement to the beneficiary at the counter of:

  •  The Issuing Bank (which is usually in the buyer's country)
  •  The counter of a bank specifically named and nominated by the Issuing Bank
  •  Any bank, if the Issuing Bank has not nominated a specific bank.

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