Red Clause Letter of Credit: Advance Payment Explained
How a red clause Letter of Credit lets the seller draw an advance before shipment, and the buyer's risk.
Reviewed by LCCheck team (owner-approved) · 2026-10-12
Short answer
A red clause Letter of Credit lets the beneficiary draw an advance before shipment, usually against a simple receipt and an undertaking to present shipping documents later. The advance is deducted from the final payment. If the seller never ships, the buyer bears the loss, so red clauses are used with trusted suppliers.
| Advance | Before shipment |
|---|---|
| Against | Receipt + undertaking |
| Risk | On applicant if seller does not ship |
How it works
- Credit includes a clause authorising an advance.
- Seller draws the advance against stated documents.
- Seller ships and presents full documents.
- Advance is deducted from the final payment.
Check
- Advance amount and documents required.
- Interest on the advance.
- Repayment if shipment fails.
Sources
General guidance, not legal advice. Your bank examines documents independently.
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