GLOBAL SELLING BLOG
What is a Green Clause Letter of Credit?
A Green Clause Letter of Credit is an advance payment offered by the issuing bank to guarantee exporters with payment. Learn about its features and benefits.
International trade between importers and exporters requires mutual trust, especially for payments. More often than not, a trade transaction (from agreement to delivery) might span across a few months. Hence, it is important to plan and agree upon a payment method that suits both the parties. This is where a Letter of Credit helps.
A Letter of Credit is a legal document provided by a bank or a financial institution, that guarantees that the exporter will be paid the full and correct amount on time. The issuing bank acts as a mediator between the parties and provides the exporter with an advance payment or guarantee of payment from the importer.
A Letter of Credit is a legal document provided by a bank or a financial institution, that guarantees that the exporter will be paid the full and correct amount on time. The issuing bank acts as a mediator between the parties and provides the exporter with an advance payment or guarantee of payment from the importer.
What is a Green Clause Letter of Credit?
A Green Clause Letter of Credit is an advance payment offered by the issuing bank to guarantee exporters with payment. As the Green Clause LC is an extension of a Red Clause LC, it is essential to understand the relevance between the two.
A Red Clause Letter of Credit acts as an advance payment. Under this LC, the issuing bank makes an advance payment to the exporter to support by providing working capital (indirectly) to buy raw materials and pay for the processing and packaging of goods to be exported. On the other hand, a Green Clause Letter of Credit not only pays for processing, packaging and raw materials, but also ensures payment for pre-shipment warehousing at the origin port and other insurance expenses. This type of LCs is only granted after the purchased goods are securely stored in the bonded warehouses at the origin port. These Letters of Credit are commonly used for trade transactions of consumables like rice, wheat, gold, etc1.
A Red Clause Letter of Credit acts as an advance payment. Under this LC, the issuing bank makes an advance payment to the exporter to support by providing working capital (indirectly) to buy raw materials and pay for the processing and packaging of goods to be exported. On the other hand, a Green Clause Letter of Credit not only pays for processing, packaging and raw materials, but also ensures payment for pre-shipment warehousing at the origin port and other insurance expenses. This type of LCs is only granted after the purchased goods are securely stored in the bonded warehouses at the origin port. These Letters of Credit are commonly used for trade transactions of consumables like rice, wheat, gold, etc1.
Features of a Green Clause Letter of Credit
Following are some of the features of Green Clause LC:
• Extends offering of Red Clause LC with additional benefits like coverage of insurance costs and pre-shipment warehousing.
• Offers 70 - 80% of the original credit amount, which is significantly more than Red Clause LC, which offers only 20 - 25%.
• Empowers exporters and manufacturers by boosting their working capital.
• Involves collateral – if the exporter defaults on payment, the collateral will be collected by the banks to compensate for the credit amount.
• Enables importers to receive better offers and discounts from exporters.
• Extends offering of Red Clause LC with additional benefits like coverage of insurance costs and pre-shipment warehousing.
• Offers 70 - 80% of the original credit amount, which is significantly more than Red Clause LC, which offers only 20 - 25%.
• Empowers exporters and manufacturers by boosting their working capital.
• Involves collateral – if the exporter defaults on payment, the collateral will be collected by the banks to compensate for the credit amount.
• Enables importers to receive better offers and discounts from exporters.
What are the documents required for a Green Clause Letter of Credit?
Some of the documents involved in a Green Clause Letter of Credit are:
1. Airway bill
2. Bill of Lading
3. Railway/lorry/other transportation receipts
4. Packing list
5. Commercial invoices
6. Quality check certificates
7. Certificate of Origin
1. Airway bill
2. Bill of Lading
3. Railway/lorry/other transportation receipts
4. Packing list
5. Commercial invoices
6. Quality check certificates
7. Certificate of Origin
How does a Green Clause Letter of Credit work?
Once the agreement is finalized, the exporter requests for payment from the importer, who then approaches the issuing bank to issue a Green Clause Letter of Credit that mentions the terms and conditions mentioned in the trade agreement between the parties. According to the Green Clause LC, goods to be exported must be stored in a bonded warehouse. Once the bank receives the documentation that ensures goods are stored in the warehouse, it issues a Letter of Credit. Then, the bank pays advance payment to the exporter.
Example of a Green Clause Letter of Credit
Here is an example of a Green Clause LC:
Business A is buying premium wheat worth $100 from Business B in India. B requests A to issue a Green Clause LC with an advance payment of $75 (75% of LC value). A agrees and applies for a Green Clause Letter with its bank.
Business A is buying premium wheat worth $100 from Business B in India. B requests A to issue a Green Clause LC with an advance payment of $75 (75% of LC value). A agrees and applies for a Green Clause Letter with its bank.
The above-mentioned example is fictional and has been used to explain the concept.
Advantages and disadvantages of Green Clause LC
Advantages
• Exporters receive cash flow solutions through advance payment.
• Importers can be assured of goods as the facilitator issues a confirmation receipt of goods in the warehouse.
• It allows importers to determine the portion of advance payment and nature of the payment series.
• The documentary credit and advance payment provide exporters with a financial guarantee.
• As the LC covers on-port warehousing, it relieves the exporters from problems involved in pre-shipment storage.
• It helps create long-term and trustworthy relationships between exporters and importers.
• Importers can be assured of goods as the facilitator issues a confirmation receipt of goods in the warehouse.
• It allows importers to determine the portion of advance payment and nature of the payment series.
• The documentary credit and advance payment provide exporters with a financial guarantee.
• As the LC covers on-port warehousing, it relieves the exporters from problems involved in pre-shipment storage.
• It helps create long-term and trustworthy relationships between exporters and importers.
Disadvantages
• They are more expensive than other LCs.
• Importers need to hire a collateral manager if a new trade deal involves a Green Clause LC.
• Once advance payments are approved, there cannot be changes even if exporters need more funds. Hence, they lack the flexibility required for international trade.
• Exporters may need to offer discounts.
• Importers need to hire a collateral manager if a new trade deal involves a Green Clause LC.
• Once advance payments are approved, there cannot be changes even if exporters need more funds. Hence, they lack the flexibility required for international trade.
• Exporters may need to offer discounts.
Conclusion
A Green Clause Letter of Credit benefits both exporters and importers – as it provides financial guarantee to an exporter, and allows the importer to negotiate better trade terms to get discounts.
Easy e-commerce exports with Amazon
Global Selling
With the growing demand for Indian products in international marketplaces, exporters and Indian sellers are keen to expand their businesses to the world. Amazon Global Selling is an e-commerce exports program that enables exporters and MSMEs to start and grow their export business in 200+ countries and territories. The exporter can simply register with the program in four simple steps and reach millions of customers shopping on 18+ Amazon international marketplaces.
More blogs on Letter of Credit
Frequently Asked Questions
What is the difference between Red and Green Clause Letters of Credit?
Two major differences between a Red Clause LC and Green Clause LC are:
• Green Clause LC extends offering of Red Clause LC with additional benefits like coverage of insurance costs and pre-shipment warehousing.
• It also offers 70 - 80% of the original credit amount, which is significantly more than Red Clause LC, which offers only 20 - 25%.
• Green Clause LC extends offering of Red Clause LC with additional benefits like coverage of insurance costs and pre-shipment warehousing.
• It also offers 70 - 80% of the original credit amount, which is significantly more than Red Clause LC, which offers only 20 - 25%.
Published on November 20, 2022.
Sources:
1. https://efinancemanagement.com/sources-of-finance/green-clause-letter-of-credit
2. https://uk.practicallaw.thomsonreuters.com/0-107-6664?transitionType=Default&contextData=(sc.Default)&firstPage=true
3. https://www.tradefinanceglobal.com/posts/red-letters-credit-green-letters-credit/
Sources:
1. https://efinancemanagement.com/sources-of-finance/green-clause-letter-of-credit
2. https://uk.practicallaw.thomsonreuters.com/0-107-6664?transitionType=Default&contextData=(sc.Default)&firstPage=true
3. https://www.tradefinanceglobal.com/posts/red-letters-credit-green-letters-credit/
Disclaimer: Whilst Amazon Seller Services Private Limited ("Amazon") has used reasonable endeavours in compiling the information provided, Amazon provides no assurance as to its accuracy, completeness or usefulness or that such information is error-free. In certain cases, the blog is provided by a third-party seller and is made available on an "as-is" basis. Amazon hereby disclaims any and all liability and assumes no responsibility whatsoever for consequences resulting from use of such information. Information provided may be changed or updated at any time, without any prior notice. You agree to use the information, at your own risk and expressly waive any and all claims, rights of action and/or remedies (under law or otherwise) that you may have against Amazon arising out of or in connection with the use of such information. Any copying, redistribution or republication of the information, or any portion thereof, without prior written consent of Amazon is strictly prohibited.
*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
Register now and get three-month subscription at just $1*
This offer is limited to selling on Amazon USA, Canada and Mexico marketplaces.
Popular Products to Sell Online
Sell Books Online | Sell Art Online | Sell Handmade Products Online | Sell Wholesale Products Online | Sell Clothes Online | Sell Grocery Online | Sell Home Products Online | Sell Beauty Products Online | Sell Watches Online | Sell Kitchenware Products Online | Sell Tea Online | Sell Furniture Online | Sell Headphones Online | Sell Toys Online | Sell Shoes Online
Blogs for Small and Medium Businesses
Accounting Basics for Online Businesses | How to Source Vendors for your Ecommerce Business | Book Keeping for Small Businesses | Invoicing Software Solutions for Small Businesses | Financial Planning Tips for SMBs | Equity and Debt Financing for SMBs | Funding Options for Online Businesses | How to Build Teams for Online Businesses | 10 Things to know before opening an Online Store | How to Choose an E-commerce Marketplace | Working Capital Management for SMBs | E-commerce Procurement Platforms in India | Payment Gateway Integration Best Practices
Blogs for Online Sellers
6 Budget Friendly Business Ideas to Start your Online Business | Starting an Online Business in India - Things you may Keep in Mind | What is Ecommerce? | How to Start your E-commerce Business | Benefits of Starting an E-commerce Business | Amazon Online Business Ideas | Empowering Entrepreneurship: Business Ideas for Women | How to start an E-commerce Business in India with Minimal Investments! | Building Side Business Ideas to Earn Money | How to start your own Business | 8 Digital Business Ideas in 2023
Sell Books Online | Sell Art Online | Sell Handmade Products Online | Sell Wholesale Products Online | Sell Clothes Online | Sell Grocery Online | Sell Home Products Online | Sell Beauty Products Online | Sell Watches Online | Sell Kitchenware Products Online | Sell Tea Online | Sell Furniture Online | Sell Headphones Online | Sell Toys Online | Sell Shoes Online
Blogs for Small and Medium Businesses
Accounting Basics for Online Businesses | How to Source Vendors for your Ecommerce Business | Book Keeping for Small Businesses | Invoicing Software Solutions for Small Businesses | Financial Planning Tips for SMBs | Equity and Debt Financing for SMBs | Funding Options for Online Businesses | How to Build Teams for Online Businesses | 10 Things to know before opening an Online Store | How to Choose an E-commerce Marketplace | Working Capital Management for SMBs | E-commerce Procurement Platforms in India | Payment Gateway Integration Best Practices
Blogs for Online Sellers
6 Budget Friendly Business Ideas to Start your Online Business | Starting an Online Business in India - Things you may Keep in Mind | What is Ecommerce? | How to Start your E-commerce Business | Benefits of Starting an E-commerce Business | Amazon Online Business Ideas | Empowering Entrepreneurship: Business Ideas for Women | How to start an E-commerce Business in India with Minimal Investments! | Building Side Business Ideas to Earn Money | How to start your own Business | 8 Digital Business Ideas in 2023
© 2024 Amazon.com, Inc. or its affiliates. All rights reserved
