International Trade Payment
Essay by people • June 19, 2012 • Research Paper • 837 Words (4 Pages) • 1,939 Views
INTERNATIONAL TRADE PAYMENT
I. PARTICIPANTS:
Parties involved: importer, exporter, issuing /paying bank, advising/confirming bank.
II. CHARACTERISTICS:
1. Definition:
RED CLAUSE L/C (Advance Clause / Special Clause): L/C whereby Issuing Bank allow Advising Bank to advance Beneficiary in order to buy goods and materials for producing goods of the issued L/C. It's called "Red Clause L/C" because it was printed in red ink before.
2. Characteristics:
- Applicant undertakes financing for Beneficiary when L/C is issued.
- The advanced amount is from Applicant's account
-> Commercial Credit, not Credit of Issuing Bank or Advising Bank.
- Advising Bank carries out procedures according to the L/C terms without undertaking or responsibility for the advanced amount.
- Issuing Bank authorizes Advising Bank to conduct the Advancing. After that (before that) Issuing Bank will (did) debit Applicant's account to reimburse (transfer to) Advising Bank.
- Issuing Bank advances a fixed amount of the L/C when receiving documents, usually: B/E of advance, invoice, debenture or guarantee of delivery
3. Advantages:
a. Beneficiary:
- Get money for preparing exports
- Decrease financial difficulty
- Have a stable export market
b. Applicant
- Get lower prices of goods
- Have a stable import source, even when world prices fluctuate
c. Banks:
Issuing Bank provide the Advance when receiving order of claiming advance from Beneficiary, in which Advising Bank certifies that draft of claiming advance and the L/C conditions are suited.
OR
Issuing Bank authorizes Advising Bank/Negotiating Bank to advance according to the red clause. The Advance and Interest will be reimbursed by Issuing Bank or deducted from Beneficiary's invoice.
This advancing of Advising Bank = a loan for advancing money of exports that commercial banks usually give, but with guarantee of reimbursement from Issuing Bank if Beneficiary breaks the contract.
Disadvantages:
4. Disadvantages: Applicant's under costs and risks of advancing
III. PROCESS OF RED CLAUSE L/C
1. Importer and exporter sign a sales contract, payment by Red clause L/C
2. Importer instructs his bank to open a letter of credit in favor of the beneficiary
3. Issuing bank issues and presents the L/C to exporter's bank (advising bank); authorize advising bank to advance money to beneficiary
4. Advising bank advises
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