What is a red clause letter of credit, and do some suppliers demand if for order fulfilment? The best way to make money they say is never to lose money. Every seller wants Letters of Credit to be sure they receive payment after order fulfilment but are all LCs safe for buyers?
No matter how desperate you are as a buyer, be careful not to fall into scammers traps. Our focus today will be on the risks and benefits of Red Clause Letter of Credit.
What is Red Clause Letter of Credit?
Red Clause Letter of Credit opines that the sellers can request for an advanced payment from the buyer before shipment of goods. The essence of the red clause (red prints) on the instrument is to draw attention to the advance payment term of the credit.
A Red Clause Letter of Credit usually has a stipulation written in red ink that permits a seller to draw up to a fixed sum from the issuing bank before shipment takes place. In other words, it helps in facilitating pre-shipment finance for a supplier who needs financing to conclude a transaction.
For example, if you have earned our trust, we may request you supply us LPFO even when we know you don’t have enough fund to execute the contract. The Red Clause Letter of credit will allow you to draw a certain amount of money to fulfil our order. In this case, it is a win-win situation for both of us.
Risks Associated With Red Clause Letter of Credit
I am sure you don’t want to lose money to a company or fraudster who is looking for free money out there. Take time to carry out due diligence on any intended beneficiary before granting any form of credit.
A red clause Letter of Credit is an unsecured loan. In essence, you risk losing your hard-earned money along the line. It’s risky for you to make advance payments to a company you are dealing with for the first time.
Just before you instruct your bank to go ahead with Red Clause LC, always consider the following:
What if the beneficiary is a fraudster? Is it not possible the payee diverts the fund for other uses? What if the receiver is currently indebted to his bank in his home country and your fund gets trapped?
Carrying out a background check on the beneficiary isn’t a bad idea at all. It will save you from a whole lot of trouble and avoidable losses.
Is Red Clause LC Bad?
As a businessman, you need to be wise in your dealings. Don’t advance any loan to a supplier if their bank is not ready to guarantee repayment.
Also, always remember that most scams come in the form of advanced payments, and in most cases, receivers are nonentities. More frustrating is the fact that making litigation against a low lifer is nothing but a waste of resources.
However, issuing a Red LC is not detrimental in its entirety. It is the right payment instrument when dealing with trusted and reliable suppliers. Moreover, a dependable business organisation may be having financial difficulty, thereby having issues with order fulfilment.
Let me round off by saying your bank will hold you liable for advances paid to your seller even if they (seller) fail to deliver. Therefore, do not advance funds to entities you don’t trust.
You may want to know which LC is ideal and secure by reading our previous article on types of letter of credit. Kindly share your thoughts with us on this article.