Red Clause vs Green Clause Letter of Credit
A documentary credit can include a special clause that lets the nominated bank pay the beneficiary before shipping documents are presented. Two of those clauses are still discussed in commodity trade: the red clause and the green clause. This guide compares them side by side..
A documentary credit can include a special clause that lets the nominated bank pay the beneficiary before shipping documents are presented. Two of those clauses are still discussed in commodity trade: the red clause and the green clause. This guide compares them side by side. It is not a rewrite of the live red clause letter of credit definition, the red clause letter of credit financing mandate page, or the alternatives for pre-shipment finance post. Those pages remain the sources for what a red clause is, how Financely arranges red clause financing, and what to use when a bank will not accept the clause.
Financely is an advisor and arranger only. We do not issue the credit and we do not lend the advance. The reader here is an importer, exporter, commodity producer or finance lead deciding which advance clause, if any, belongs in a documentary credit. Broker chains are not the audience.
What is the difference between a red clause and a green clause letter of credit?
A red clause credit allows a pre-shipment advance against a receipt or undertaking, often before goods exist as stored inventory. A green clause credit also allows a pre-shipment advance, but usually only against warehouse evidence, typically a receipt and insurance. In both cases the advance is later deducted from the presentation. The credit's wording controls.
The color names come from older practice, described in the ICC Users' Handbook for Documentary Credits under UCP 600. The special advance wording was printed in red or green ink so it could not be missed. Today the clause is typed into the credit like any other condition. Neither label is a UCP 600 type. The ICC Academy defines a red clause as an authorization for the nominated bank to pay an advance to the beneficiary as a pre-shipment credit requirement, and a green clause as a pre-shipment advance against a document of title evidencing storage, usually a warehouse receipt.
How each advance works
Red clause: advance against a receipt or undertaking
Under a red clause, the nominated bank may prepay the beneficiary against a receipt or an undertaking to ship, without the need to provide documents of title as security for the advances. That is the ICC Users' Handbook formulation. If the beneficiary later fails to ship, the issuer receives nothing for that reimbursement and recovers from the applicant. The fuller definition, including how the advance is later deducted, sits on the red clause definition page. What the supplier actually presents, and how a clean draw differs from a documentary one, is covered in clean vs documentary red clause letters of credit.
Green clause: advance against warehouse evidence
Under a green clause, the nominated bank may prepay only against documents of title, usually warehouse receipts, covering goods being assembled for shipment. Receipts are typically pledged to the nominated bank, and insurance is usually required. If the beneficiary fails to ship, the nominated bank is entitled to reimbursement of the advance and interest from the issuer, and delivers the warehouse receipts to the issuer. How that draw works in practice is set out in how a green clause LC warehouse advance works. The commercial mandate for arranging the clause is on green clause letter of credit financing.
In both cases, when a complying presentation of shipping documents is later made, the nominated bank deducts the advance and any interest the clause allows from the credit proceeds. The clause has to say how that deduction works. UCP 600 does not supply a default interest rate or a default advance amount.
What changes for the buyer, the seller and the banks
Which clause is safer for the buyer?
A green clause is usually safer for the applicant because the advance is tied to stored goods and documents of title, not only to a promise to perform. It is not risk-free. Warehouse quality, insurance and recovery still matter, and the applicant may have to reimburse an advance if shipment never follows. Banks decide whether either clause is acceptable.
For the seller, a red clause can bring funds earlier, sometimes before the goods have been produced or gathered, but it usually comes with tighter bank scrutiny and a smaller authorized amount, if it is available at all. A green clause asks more operational work: an acceptable warehouse, a usable receipt, insurance, and often inspection before the advance. For the banks, both clauses create pre-shipment exposure that a standard sight credit does not. The reimbursement chain, and what changes when warehouse receipts exist, is the subject of who carries red and green clause advance risk.
Payment timing, documentary burden and recovery if shipment fails all follow the text of the credit and the applicant's reimbursement arrangement, not the color name. A loosely worded clause helps no one.
Red clause versus green clause, side by side
The table below is a comparison of usual practice. It is not a substitute for the clause in a particular credit, and it does not publish advance percentages.
| Point of comparison | Red clause | Green clause |
|---|---|---|
| When the advance is available | Often before goods exist as stored inventory, once the clause conditions are met | Usually only after goods are in store and evidenced |
| Documents for the draw | Typically a receipt or undertaking to ship, sometimes with extra commercial evidence | Usually a warehouse receipt and insurance, and any other documents the credit names |
| Whether goods must already exist | Not necessarily, if the clause is a clean or lightly documented red clause | Yes, in identifiable stored form, as evidenced by the warehouse documents |
| Buyer risk | Higher unsecured gap if the seller takes the advance and does not ship | Lower unsecured gap if the receipts are valid and the goods remain, but not risk-free |
| Seller effort | Lower documentary burden at the advance stage, subject to the clause | Higher: acceptable warehouse, receipt, insurance, and often inspection |
| Typical use | Production or procurement funding before goods are stored | Storable commodities accumulated in warehouse before shipment |
| Governing text | The credit, not a UCP 600 article | The credit, not a UCP 600 article |
Secondary articles sometimes quote typical advance ranges. Trade Finance Global has cited figures of around 20 to 25 percent for a red clause and around 75 to 80 percent for a green clause. Those figures are not UCP rules, they are not a bank's standard advance, and they are not Financely pricing. The amount is negotiated and written into the credit. The BAFT Guide to Letters of Credit also discusses both clauses; where emphasis differs from the ICC formulation, the ICC wording on documents of title should lead, and storage or insurance costs should be treated as a common commercial reason for a green clause, not as a competing definition.
Does UCP 600 define these clauses?
No. UCP 600 governs documentary credits, but it has no standard article that creates a red clause or a green clause. Those labels come from older practice, when the special advance wording was printed in red or green ink. Today the authority, documents, amount, interest and reimbursement terms have to be written into the credit itself.
That is why clause comments matter as much as the commercial contract. If the credit is silent on who may advance, against which documents, how interest is treated, or what happens if shipment does not follow, the nominated bank may simply refuse to pay an advance. UCP 600 will still govern the documentary credit as a whole, including examination of the later shipping presentation. It will not invent an advance clause that was never written.
When to use one clause rather than the other
Discuss a red clause when the seller needs funds to procure or produce goods that are not yet in store, and the buyer and banks will accept that exposure. Discuss a green clause when goods can be stored, inspected and evidenced before the advance. If neither clause is bankable, use a different facility, as set out in the alternatives post.
When a red clause discussion fits
A red clause discussion fits when the seller needs funds to procure, grow or manufacture goods that are not yet in store, the buyer is prepared to take that pre-shipment exposure, and a bank is prepared to write the authority into the credit. It is a poor starting point when the beneficiary is weakly known, the corridor is difficult, or the applicant's facility has no room for unsecured pre-shipment risk. In those cases a documentary red clause, a smaller authorized amount, or a different structure may be the more realistic conversation.
When a green clause discussion fits
A green clause discussion fits when the goods can be stored, inspected and evidenced before any advance is paid, and the warehouse and insurance package will stand up to bank review. It is the more natural conversation for many agricultural and metals parcels that accumulate before shipment. It is the wrong conversation if the goods do not yet exist, or if the company actually needs a revolving inventory facility rather than an advance inside one credit. That product difference is explained in green clause LC vs warehouse receipt financing.
When a different structure is better
If the issuing bank will not accept either clause, the documentary credit can still be issued as a standard sight or usance credit. Pre-shipment funding can then sit in a separate facility, including pre-shipment finance, pre-shipment finance against an export letter of credit, warehouse receipt financing, or a buyer advance supported by an advance payment guarantee. Those options are catalogued, without repeating that list here, in red clause letter of credit alternatives for pre-shipment finance. A transferable letter of credit is a different tool again: it passes drawing rights down a supply chain. It is not a substitute for an advance clause, and this pillar is not a transferable explainer.
How Financely can help you choose and package the clause
Financely advises on fit, wording and the file, and can introduce qualified clients to banks or trade finance providers. We do not decide which clause a bank will issue, and we do not pay the advance. Red clause mandates belong on the live red clause letter of credit financing page. Green clause mandates belong on green clause letter of credit financing. Broader documentary credit support is described under documentary letter of credit services for importers and exporters. A qualified importer, exporter or producer can submit the transaction for advisory and arranging support. Financely does not issue the credit and does not lend the advance.
Frequently asked questions
Is a green clause just a red clause with extra storage costs?
Not exactly. Some guides describe a green clause as a red clause that also covers warehousing and insurance. The ICC formulation is stricter: the nominated bank may prepay only against documents of title, usually warehouse receipts, covering goods being assembled for shipment. The ICC wording should lead, and storage costs are a common reason for the clause.
Can a credit include both a red clause and a green clause?
A credit can only do what its text allows. Parties sometimes discuss staged conditions, for example an early documentary red clause draw and a later warehouse-backed draw, but that has to be drafted clearly and accepted by the banks. A combined clause is not standard practice, and Financely cannot issue the credit.
Are advance percentages fixed by UCP 600?
No. UCP 600 does not set an advance percentage for either clause. The amount, or the method for calculating it, belongs in the credit. Secondary articles sometimes quote typical ranges. Those figures are not UCP rules, and a bank may decline the clause or size it differently. Financely does not publish advance percentages.
What if the buyer's bank refuses both clauses?
Then the documentary credit can still be issued as a standard sight or usance credit, and the pre-shipment funding can sit in a separate facility, a buyer advance with an advance payment guarantee, warehouse-receipt finance, or another structure. See the guide to red clause letter of credit alternatives for pre-shipment finance.
Does Financely decide which clause the bank will issue?
No. Financely advises on fit, wording and the file, and can introduce qualified clients to banks or trade finance providers. The issuing bank decides whether to include an advance clause, and the nominated bank decides whether to make an authorized advance. Submit a real transaction at https://www.financely.io/deal-submission
Which clause is more common in commodity trades?
Green clause language is often discussed for storable commodities that can be warehoused, inspected and later shipped, such as agricultural products or metals. Red clause language is discussed when the seller needs funds earlier in the cycle. Frequency varies by bank, corridor and commodity. There is no reliable public market-share figure to cite.
Can these clauses be used inside a transferable letter of credit?
Only if the credit, the transfer, and the transferring bank's consent all allow it. Transferable credits are already covered on the transferable letter of credit page and related guides. Combining an advance clause with a transfer adds complexity and should be reviewed as a mandate, not treated as a standard template.
Request a review
If you have a real contract and need help choosing or packaging an advance clause, submit the transaction for advisory and arranging support. Financely does not issue the credit and does not lend the advance.
Sources and references
- ICC, Users' Handbook for Documentary Credits under UCP 600, chapter on prepaying the beneficiary: https://library.iccwbo.org/content/tfb/BOOKS/BK_0002/BK_0002_03_CH16.htm.
- ICC Academy, "Key trade finance products: Definitions and use cases": https://academy.iccwbo.org/trade-finance/article/key-trade-finance-products-definitions-and-use-cases/.
- Bankers Association for Finance and Trade (BAFT), Guide to Letters of Credit: https://www.tradefinanceglobal.com/wp-content/uploads/2024/06/BAFT-Guide-to-Letters-of-Credit_TFG.pdf.
- Trade Finance Global, "Red clause vs green clause letters of credit", for attributed secondary ranges only: https://www.tradefinanceglobal.com/posts/red-letters-credit-green-letters-credit/.
- ICC, Uniform Customs and Practice for Documentary Credits, UCP 600: https://library.iccwbo.org/content/tfb/RULES/tfb-ucp600-rules.htm.
- Financely deal submission: https://www.financely.io/deal-submission
If you have a bankable trade file, start with the USD 500 trade finance eligibility screen before or alongside deal submission. Financely is an advisor and arranger, not an issuing bank.