A green clause letter of credit is a letter of credit that allows the beneficiary to receive an advance before shipment, on condition that the goods have already been bought and placed in a warehouse in the name of, or pledged to, the advancing bank. The bank releases cash against documents such as warehouse receipts and insurance certificates, then deducts the advance from the proceeds once the goods are shipped and the full documents are presented.
The green clause is an extension of the red clause letter of credit. The single difference is security: a red clause advance is made against the exporter's promise alone, while a green clause advance is made against stored goods the bank controls. Neither form is regulated by a separate rule; both are conditions written into an ordinary credit subject to UCP 600.
Green clause letter of credit in plain terms
Think of a pawn shop that lends against a watch. The shop does not need to trust the borrower, because it holds the watch until the loan is repaid. A green clause works on the same principle. The exporter buys the crop or raw materials, puts them in a warehouse the bank can control, and gets an advance against them. When the goods leave for the port, the advance is settled from the payment.
So the buyer is still funding the seller early, as with a red clause, but it is no longer relying on the seller's word alone. If the seller fails to ship, the goods sitting in the warehouse can be sold to repay the advance. That extra protection costs money (storage, insurance and inspection), so green clauses are used where the goods are valuable and easy to store.
How a green clause works
- The importer's issuing bank opens a credit with a green clause stating the maximum advance, the documents required for it and the deadline for shipment.
- The exporter buys and delivers the goods to an approved warehouse, which issues a receipt in favour of the advancing bank or endorsed to it. The goods are insured, often with the bank named as loss payee.
- The advising or nominated bank pays the advance against the warehouse receipt, the insurance document and the exporter's undertaking to ship.
- When shipment is due, the bank releases the goods to the carrier, the exporter obtains the bill of lading, and the full set of documents is presented under the credit. The advance and interest are deducted from the payment.
If shipment never happens, the advancing bank can sell the stored goods and claim any shortfall from the issuing bank, which in turn debits the importer.
Red clause and green clause compared
| Feature | Red clause | Green clause |
|---|---|---|
| Security for the advance | Exporter's receipt and undertaking | Goods held in a warehouse under bank control |
| Main risk for the buyer | Exporter takes the money and does not ship | Goods deteriorate, are overvalued or the receipt is false |
| Extra costs | Interest on the advance | Interest plus storage, insurance and inspection |
| Typical goods | Produce bought before it exists or is collected | Storable commodities already bought |
Where green clauses fit
Green clauses suit storable commodities such as grain, cotton, coffee, metals and rubber, where the exporter accumulates stock at or near the port before a ship is available. The structure links the credit with warehouse receipt financing, which works only where warehouses are reliable and receipts are legally recognized; some countries operate regulated warehouse receipt systems for agricultural goods for this reason. Where those systems are weak, banks may appoint a collateral manager to supervise the stock.
For the exporter, the green clause can be cheaper than its own packing credit or inventory financing, since the advance relies on the importer's bank. For the buyer, it turns an unsecured prepayment into a secured one, which is often what its bank requires before agreeing to an advance at all.
Risks and controls
The security is only as good as the warehouse. Known risks include receipts issued for goods that do not exist, the same stock pledged to more than one lender, and goods of lower quality than described. Major commodity fraud cases have involved warehouse receipts of this kind, which is why banks verify the warehouse operator, inspect the goods and use trade authenticity checks. Banks also apply a haircut, advancing less than the market value of the stock, to cover price falls before shipment. As with all credits, the parties and goods are screened against sanctions lists and for signs of trade-based money laundering.