A Green Clause in a Letter of Credit (LC) is a provision allowing the beneficiary (exporter) to receive an advance payment before shipment, typically used to finance the preparation and storage of goods. It's an extension of the Red Clause LC.
Understanding Green Clause LCs
Green Clause LCs build upon the concept of Red Clause LCs, which also provide pre-shipment financing. However, the Green Clause adds further conditions, usually requiring the exporter to provide proof of storage in a warehouse before receiving the advance payment. This offers the issuing bank and the applicant (importer) a degree of security that the goods are being prepared and are stored safely.
Key Features of a Green Clause LC:
- Advance Payment: Provides the exporter with funds to prepare goods for shipment before they are shipped.
- Warehouse Storage Requirement: Typically mandates that the exporter store the goods in a designated warehouse and provide a warehouse receipt as evidence.
- Security for the Importer: Offers the importer assurance that the goods are being processed and stored, reducing the risk of non-delivery.
- Part of LC Value: The advance payment is deducted from the total value of the LC upon presentation of the shipping documents.
- Financial Tool: Helps exporters finance production, storage, and other pre-shipment expenses.
Green Clause vs. Red Clause LC
| Feature | Red Clause LC | Green Clause LC |
|---|---|---|
| Advance Payment | Yes | Yes |
| Storage Condition | No specific requirements | Requires storage in a designated warehouse |
| Security | Relies more on the exporter's integrity | Provides greater security through warehouse storage verification |
Example Scenario
An importer needs to purchase a large quantity of agricultural produce from an exporter. The exporter requires funds to harvest, process, and store the produce.
- Importer requests LC: The importer applies to their bank for a Letter of Credit with a Green Clause.
- Bank issues LC: The issuing bank includes a Green Clause specifying the advance payment terms and the requirement for warehouse storage.
- Exporter receives advance: Upon presenting evidence that the produce is stored in an approved warehouse (warehouse receipt), the exporter receives the advance payment from the advising bank.
- Exporter ships goods: The exporter then ships the goods to the importer.
- Final Payment: Upon presentation of the shipping documents, the advising bank claims the remaining amount from the issuing bank and pays the exporter the balance (total LC value minus the advance payment).
Advantages of Using a Green Clause LC
- Facilitates Trade: Enables exporters with limited capital to fulfill large orders.
- Reduces Risk: Provides security for the importer that the goods are being prepared and stored correctly.
- Builds Trust: Fosters stronger relationships between importers and exporters.
Disadvantages of Using a Green Clause LC
- Increased Complexity: More complex than a standard LC, requiring careful documentation and management.
- Potential for Misuse: Risk of funds being misused if the exporter fails to store the goods as agreed.
In conclusion, a Green Clause LC is a specialized type of Letter of Credit offering pre-shipment finance coupled with the requirement for verified warehouse storage, providing a balance between facilitating trade and mitigating risk for both importers and exporters.
