red clause letter of credit (L/C)

L/C that carries a provision (traditionally written or typed in red ink) which allows a seller to draw up to a fixed sum from the advising or paying-bank, in advance of the shipment or before presenting the prescribed documents. It is normally used only where the buyer and seller have close working relationship because, in effect, the buyer is extending an unsecured loan to the seller (and bears the financial risk and the currency risk). Rare nowadays, the red clause L/Cs were once popular in fur trade with China and wool trade with Australia.