A red clause letter of credit incorporates a clause, traditionally written in red, which authorizes the bank acting
as the negotiating or paying bank to pay the beneficiary in advance of shipment. This enables the purchase
and accumulation of goods from a number of different suppliers, and the arrangement of shipment in
accordance with the letter of credit terms. Such advances will be deducted from the amount due to be paid
when the documents called for are presented under the letter of credit. If the beneficiary fails to ship the
goods or cannot do so before the expiry of the letter of credit, the issuing bank is bound to reimburse the
negotiating or paying bank, recovering its payment from the applicant.
