Anticipatory credits are a mix between cash in advance and a standard letter of credit. In fact, anticipatory credits allow the seller to receive payment before shipping the goods.
If you are familiar with letters of credit, you may know that the buyer must open the credit before the seller ships the goods, yet this latter is paid upon presentation of transport documents, i.e. after he has shipped the goods.
Anticipatory credits deviate from this principle and allow the seller to receive a certain amount of payment before shipment of the goods: the advanced percentage can vary depending on the type of credit, but it usually ranges between 20% to 80%.
Although parties can resort to anticipatory credits for a number of reasons, the use of this type of credit makes special sense in situations where it is difficult for the seller to raise funds for his business operations, either because of a lack of capital in the country of because interest rates are too high. This is often the case in some commodity-exporting countries, where such credits are mostly used.
There are two types of anticipatory credits: red clause credits and green clause credits.
How Red Clause Credits Work
Suppose that an Australian company sells a batch of wool to a New Zealand firm under a red clause credit. The New Zealand buyer opens a red clause letter of credit in favor of the Australian seller. At this point, the seller parks the goods in a third-party warehouse, and obtains a receipt of deposit. When the seller presents that receipt to the advising bank in Australia, the bank will pay.
Note that the seller has not fully parted with the goods, because he still has to ship them. If anything happens to the goods, the New Zealand buyer has to sue the seller in Australia to obtain goods that are still there, whereas payment has already been made. Not a convenient situation.
For this reason, red clause credits should be used only when there is a high level of trust between the parties.
How Green Clause Credits Work
Green clause credits work in the same way as red clause credits and trace their origins in the coffee trade in central Africa.
The big difference is that, under a green clause letter of credit, the goods are stored in the name of the bank. This provides better assurance for the buyer because the seller cannot deal with the goods.
Essentially, even if the buyer has yet to receive the goods physically, he is sure to receive title of the goods through the bank. For this reason, payment advance under green clause credits can be as high as 80%.
Globartis Research Center