That large export order you just received is a big win. But before your client sends the payment, you need to source raw materials, pay your workers, and get the shipment ready. Many exporters use their own savings to pay for this. But there is a smarter way: a Red Clause Letter of Credit.&nbsp;

It is a special type of LC that allows the exporter to receive a cash advance from the bank before the goods are shipped, giving you the working capital to fulfill the order without dipping into your own funds.

In this blog, you’ll learn what a Red Clause LC is, how it works, the documents you need, its pros and cons, and how it stacks up against a Green Clause Letter of Credit.

A Red Clause Letter of Credit (LC) is a payment arrangement providing a cash advance even before you ship any goods. Your buyer opens it through their bank, called the issuing bank. That bank then sends the LC to your bank in India, known as the advising or nominated bank. Your bank releases the money to you, the beneficiary.

To access the money, you only need to submit a signed receipt and a Letter of Indemnity, a written commitment that you’ll ship the goods as agreed or return the advance.

How is a Red Clause Letter of Credit different from an Export Packing Credit?

<a href="https://www.skydo.com/blog/export-packing-credit">Export Packing Credit (EPC)</a> is a loan provided by your bank against an export order. You must apply for it separately and meet the eligibility criteria too.

A Red Clause LC is an advance created by the buyer (your client). The buyer’s bank sends the money to your bank through the international banking system.

What are the types of red clause letters of credit

There are two types of red clause LC depending on how much documentation your buyer requires before releasing the advance

1. Unsecured or “Clean” Red Clause LC

This is a more common version when the buyer has a high level of trust in the exporter.

2. Secured or “Documentary” Red Clause LC

This type offers your buyer more protection and is well-suited for newer trade relationships.

A Red Clause LC follows a sequential pattern from start to end. Here’s how the process works step-by-step:

1. Buyer applies for the Red Clause LC

You and your buyer agree on the advance amount. The buyer then instructs their bank (the issuing bank) to open a red clause LC specifying how much you can draw before shipment.

2. Issuing bank sends the LC to the advising bank

The issuing bank sends the LC to your bank in India (the advising bank). Your bank reviews it and notifies you that the credit is ready to use.

You submit a signed receipt and a letter of indemnity to your bank. They release the money so you can begin production.

You use the advance to buy raw materials, pay for labour, and fulfil the order. Once ready, you ship the goods as per the agreed schedule.

5. You submit the shipment documents

After shipment, you present the required documents, including the bill of lading and commercial invoice to your bank for final settlement.

Your bank deducts the advance and any applicable interest from the total LC value and transfers the remaining balance to you. The documents are then forwarded to the issuing bank.

Suppose a Surat-based textile exporter receives an order from the US worth $50,000. The buyer agrees to open a Red Clause LC with a 30% advance, i.e. $15,000, to help them get started.

What are the documents required for a red clause LC?

Not all documents are required at the advance stage of a red clause LC. Here is an infographic that shows what documents are required at each stage:

Your LC process is a lot smoother when you have the right set of documents with you. Here's a list that you can save to ensure you miss nothing:

What are the advantages of red clause letters of credit

A red clause letter of credit provides the much-needed liquidity, but it’s also a highly effective way to build stronger relationships with international buyers. Here are more advantages:

As a seller, you know that the money is coming from the buyer’s bank and not solely based on the buyer’s promise.

When a buyer opens a Red Clause LC for you, it shows they’re confident in your ability to deliver. This creates the foundation for a strong and long-term buyer-seller relationship.

Red clause LC provides you the room to negotiate the advance percentage amount based on your production needs. You can also request the advance in INR to pay local vendors quickly.

What are the risks and disadvantages of red clause LCs

Despite its advantages, a red clause LC could be risky. Here's what to watch out for.

Buyer exposure if seller fails to deliver

If the seller doesn’t export the goods, the buyer is liable to pay their bank. It’s a tremendous risk for the buyer, and therefore, the red clause LC is only offered to exporters with a strong, proven track record.

Banks charge higher fees to compensate for the early release of funds. They also start charging interest from the day the amount enters your account, which is deducted from the final settlement. Taking a sizable cut from the entire amount.

Red clause LCs involve paperwork at two separate points: first, when you claim advance and then again at final settlement. Any discrepancy in the documentation can cause a delay in the final settlement.

Red Clause LCs are high-risk instruments. Banks offer this facility to selected exporters who have an established relationship with them and a clean export history. This can be a demerit if you’re working with a new banking partner.

Difference between red clause and green clause letters of credit

You might have come across a green clause letter of credit, this is not the same as the red clause letter of credit. Here’s a quick red clause vs. green clause LC comparison table:

A Red Clause LC solves your pre-shipment cash flow problem. But you still need your final payment to reach you quickly, at the best conversion rate, and with the right compliance documentation.

That's where <a href="https://www.skydo.com/blog/seamlessly-accept-international-payments-in-india">Skydo</a> comes in. Skydo is a payment platform for Indian exporters to solve <a href="https://www.skydo.com/blog/skydo-cross-border-payment-challenges">cross-border payment challenges</a>. With Skydo, <a href="https://www.skydo.com/blog/how-do-you-receive-a-foreign-remittance-in-a-savings-account">you receive foreign remittance in your savings bank account</a> quickly and without delays, hidden fees, or compliance headaches.

Clean record-keeping: As Skydo saves all ‌payment information with a proper paper trail, you always have access to thorough documentation to apply for future loans and surprise audits.

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Your pre-shipment borrowing just got cheaper. The recently launched<a href="https://www.pib.gov.in/PressReleasePage.aspx?PRID=2210874&amp;reg=3&amp;lang=1"> Niryat Protsahan</a> sub-scheme earmarked 2.75% as the base rate for interest subvention covering 75% of tariff lines.

In plain language, you get the much-needed pre-shipment credit at a more affordable rate. This eases the cost of financing your manufacturing, labour, and packing needs while waiting for your buyer to pay.

If that’s what you’ve been looking for, we suggest you read this blog till the end as we explain the meaning, types, interest rate, and eligibility of pre-shipment finance in this blog.

So, what exactly is pre-shipment credit? Before we get to that, it’s also referred to as <a href="https://www.skydo.com/blog/export-packing-credit">packing credit or export packing credit</a>.&nbsp;

It is a short-term loan from your bank to fund your business from the moment you receive an order until the day you ship the goods. This includes everything from procuring raw materials, manufacturing to labor, processing, labeling, and even inland transport to the port.

However, this financing cannot be used for general business expenses. Because the RBI treats export credit as a priority sector, you benefit from concessional interest rates, significantly lower than regular overdraft or cash credit limits.

What are the types of pre-shipment credit

When choosing the right pre-shipment finance for your business, you generally have two main paths depending on your cost structure and how you invoice your buyers:

This is the standard choice if your production costs, like labour and raw materials, are primarily in Indian Rupees. The interest rate is linked to your bank’s MCLR or base rate plus a concessional spread. If you are an MSME exporter, you also get the 2.75% interest subvention above this.

Pre-Shipment Credit in Foreign Currency (PCFC)&nbsp;

This is a better choice if you invoice your buyers in a foreign currency like USD, EUR, or JPY. The interest rates are linked to international benchmarks like SOFR or EURIBOR, which are usually cheaper than rupee loans. The advantage here is that you borrow and repay in foreign currency. Therefore, you automatically protect yourself from exchange rate fluctuations.&nbsp;

Besides these two above, you also have access to more flexible options of pre-shipment credit:&nbsp;

Your bank can provide short-term credit against advance payments like cheques or drafts even before they clear. This gives you quick access to funds to start production immediately.

With a running account, you can get credit from your bank without presenting a specific export order upfront. You share the confirmed order details within a specific timeframe, like 30 days. This is a brilliant choice for established exporters with a sound track record and managing multiple orders in quick succession.

What's the difference between pre-shipment credit and post-shipment credit?

You might know the basic difference: pre-shipment finance gets your goods to the port, post-shipment finance ensures your business stays liquid while you wait to get paid. But there’s more; check out this table to find out.

Use this table as reference. The actual interest rate for pre-shipment credit depends on the bank, your credit profile, export track record, and order size.

While the interest rate must be your focus, don’t overlook these additional costs:

Standard Tenure: Typically you have up to 180 days from disbursement to ship your goods and settle the loan.

Extensions: If your production cycle is complex, you can usually extend this period to 360 days with prior approval from your bank.

Recent RBI Relief: A recent RBI measure allows for a tenure of up to 450 days for eligible disbursements

The Penalty for Delays: If you exceed the allowed timeline without an extension, your bank will withdraw your concessional interest rate and reprice the entire loan at much higher commercial rates retrospective

How banks assess pre-shipment credit (limit calculation)

These are the most-common steps performed by banks to assess your credit limit:

Imagine you receive an export order for handloom textiles worth $80,000 on a CIF basis.

This is not an exhaustive list, but a useful reference to know what banks check during assessing your loan request:

How to get pre-shipment credit — step by step

Follow these steps below after you have made ‌your decision to avail pre-shipment credit from the bank:

A confirmed purchase order or an irrevocable Letter of Credit (LC) from your buyer is required to start the process.

Meet with your Authorized Dealer (AD) bank to discuss your production needs and share your company’s export track record.

Gather your IEC, GST, and proforma invoice, and ensure you’ve generated your UIN on the DGFT portal to lock in your concessional interest rates.

Step 4: Bank assessment and sanction&nbsp;

The bank will evaluate your creditworthiness and sanction a limit

Step 5: Fund release and monitoring&nbsp;

You can draw the funds in a lump sum or in stages to pay for raw materials and labor

Once you ship the goods, you must close the loan by either converting it into post-shipment credit or settling it directly from your incoming export proceeds.

Check out this eligibility list, including a few critical details, before you apply for pre-shipment credit:

Legal Identity:&nbsp;You must have a valid<a href="https://www.skydo.com/blog/iec-code-apply-online"> Importer-Exporter Code (IEC) </a>issued by the DGFT, along with active PAN and GST registrations.

Proof of Order:&nbsp;A confirmed export order or an irrevocable Letter of Credit (LC) from your buyer&nbsp;

Clean record:&nbsp;Your name must not appear on the RBI’s caution list for unresolved defaults or the ECGC’s Specific Approval List (SAL).

Product Compliance:&nbsp;Your goods must be under the freely permissible category in the Foreign Trade Policy&nbsp;

Financial Health:&nbsp;Banks check for a satisfactory credit history and a stable banking relationship to ensure you can execute the order

Country Risk Check:&nbsp;If you are exporting to countries on the Restricted Cover Countries (RCC) list, you may need specific ECGC approval before the bank will release funds.

On top of the eligibility requirements, remember these RBI guidelines to avoid compliance hassles at the last moment:

Despite all the preparedness, you could still fall prey to common mistakes or come face-to-face with an unprecedented risk. Treat this list as a mini-guide to help you manage the situation if you face one:

Pre-shipment credit takes care of your production costs and ensures you have enough money to ship the goods on time. But an export order is only completed after you get paid by the buyer.&nbsp;

This is where Skydo steps into the export workflow. It helps you get paid on time, with minimum fees, and stay compliant with the RBI regulations.

Here’s what happens when you use Skydo to receive international payments:

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When you get a new export order, you normally agree to get paid after 60 to 120 days. That’s considered standard payment terms in the export industry. But this creates a problem: you need working capital to buy raw materials, manufacture, and ship your products. It is at this point that export packing credit steps in.&nbsp;&nbsp;

Export packing credit bridges this cash gap by providing you with pre-shipment funds at concessional interest rates, far cheaper than standard bank loans.

In this blog, we discuss what export packing credit is, why this loan facility matters for Indian exporters, how to apply for such a loan, and what are its different types.&nbsp;

Export packing credit is a short-term pre-shipment finance facility. It provides you with enough working capital to cover expenses such as procuring raw materials, manufacturing products, labeling, packing, and even warehousing or inland transportation. A SaaS exporter can use this money to meet operational costs like wages, travel expenses, and utility payments.

An export packing credit differs from a working capital loan that banks provide. First, you can only use the money to fund specific export transactions and not general business expenses. Second, banks offer this credit at concessional interest rates, significantly lower than standard working capital loans or overdrafts.

Lastly, because this loan is self-liquidating, it’s repaid directly from your export proceeds once your buyer pays.

For example, an exporter in India gets an order from a US buyer for $100,000 worth of garments. Before shipping the order, the exporter needs money to:

Since the buyer will only pay after the shipment, the exporter uses export packing credit to fund these expenses and repays the loan once the export payment arrives.

The payment cycle in international trade stretches anywhere between 30 to 120 days after shipment. Meanwhile, your costs for raw materials, labor, and packaging start the moment you accept the contract. Using the internal cash flow to fund these expenses compels you to turn down large orders because you’re hardly left with money to support production.

Export packing credit changes this dynamic by offering short-term finance at a lot cheaper rate. If you’re an MSME manufacturer, the upside is even greater. You can take advantage of the <a href="https://www.skydo.com/blog/interest-equalisation-scheme-in-india">Interest Equalisation Scheme</a> to get an additional 3% reduction in your interest rate.

The best way any exporter can pass on the benefit of low interest rates is by pricing their products competitively in international markets. You also have the confidence to take on more orders without missing deadlines because of financial constraints.

You have two choices for structuring export packing credit. The right choice comes down to your currency risk and whether you qualify for government subsidies.

This is the standard option if your production costs are primarily in Indian rupees.

Pre-Shipment Credit in Foreign Currency (PCFC)

Exporters who invoice their buyers in a foreign currency (like USD, EUR, or GBP) and have confirmed receivables, meaning payments contractually due from the buyer, opt for this method.

You can also use these specialized facilities to take care of export financing:

• Advances against Letters of Credit (LC): A confirmed LC from your buyer’s bank often leads to faster approvals and more flexible terms.

• Advances against Duty Drawback / Incentives: Banks can advance funds against your expected RoDTEP or duty drawback claims to keep your cash moving.

• Against Advance Licence: If you hold an Advance Licence for duty-free imports, you use the packing credit to import raw materials for production

The interest rate depends on how your bank calculates it. Below is a breakdown of that calculation for each type of credit:

To help you get the best deal on your financing, here is a simplified look at how these interest rates actually work for your business:

Interest Equalisation Scheme — extra savings on export credit

The Interest Equalisation Scheme (IES) is a government-led initiative providing a direct subsidy on the interest rates charged for rupee packing credit.

Here are the key points you need to know about how this scheme functions:

The Interest Equalisation Scheme is transitioning into a broader and more modern framework:

Monitor the RBI/DGFT notifications and check with your bank to know about the availability status.

Who is eligible for export packing credit?

You must meet a few baseline requirements to qualify for this low-interest financing. Banks follow a strict checklist to ensure you use the funds for legitimate trade.

Usually, banks require a confirmed export order before approving an export credit. However, if you are an established exporter with a solid track record, you can apply for a “Running Account Facility”. Under this setup, the bank releases credit to you upfront, on the condition that you will share the actual export orders within a specific timeframe, typically 30 days.

Well-established exporters with strong credit histories may qualify for unsecured limits backed only by their export documentation. For others, banks typically take primary security over your raw materials, work-in-progress, and finished goods. ECGC insurance cover reduces the bank’s risk and often lowers collateral demands. For MSMEs, the Credit Guarantee Scheme for Exporters (CGSE) provides 100% guarantee coverage, giving them collateral-free access for their export needs.

How to apply for export packing credit — step by step

Follow these exact steps to get export credit on your next export order:

Everything starts with a confirmed export order or an irrevocable Letter of Credit (LC) from your buyer. This anchors your entire application process.

Talk to your bank or any AD bank. Share your company’s profile, your funding needs for this specific order, and your past export performance with them.

Banks require a paper trail to prove your business is legitimate and the order is real. You will typically need to provide:

Banks calculate your credit limit, which can be between 75% and 90% of the order’s FOB (Free On Board) value.

Step 5: Funds are disbursed and monitored

Once sanctioned, you either get the funds in one go or in stages matching your production cycle. Banks may even pay your suppliers directly or move the money into a dedicated packing credit account to monitor the end-usage.

Step 6: Ship your goods and repay the loan

After you ship your goods and the buyer pays the amount, the loan gets self-liquidated, meaning it gets credited from your export proceeds. You have 180 days (can be extended to 360 days sometimes) to ship goods and submit the bills, and close the loan. You can also use alternative funding like existing proceeds in the <a href="https://www.skydo.com/blog/eefc_account_overview_full_form_meaning_eligibility_benefits">Exchange Earners’ Foreign Currency (EEFC)</a> account to repay the loan.

How is the packing credit limit calculated?

The most critical part of export packing credit limit calculation starts with the FOB (Free On Board) value of your specific export order or Letter of Credit.

Banks commonly fund between 75% and 90% of this value, requiring you to provide the remaining 10% to 25% as your own.

If your contract with the buyer is on CIF (Cost, Insurance, and Freight) terms, the bank will automatically deduct 10% for sea freight and 1% for insurance to find the actual manufacturing value to finance.

Banks also evaluate your past export performance, your industry’s specific risks, and your general credit history to ensure you have the capacity to deliver. If it’s satisfactory, you may qualify for a running account facility where your limit is determined by your total annual turnover. Banks may also provide an aggregate limit if you have multiple export orders.

Securing ECGC insurance cover is a smart move to encourage banks to sanction higher limits with more flexible collateral terms.

To see how this works in the real world, imagine you receive an order for furniture worth $100,000 on a CIF basis.

Final Limit: Your eligible packing credit for this order would be $70,000 (or approximately ₹56,00,000 depending on the exchange rate).

Export packing credit vs Letter of Credit vs post-shipment finance

While these terms are often used in the same breath, they serve very different purposes in your export cycle.&nbsp; Here is how export packing credit, Letter of Credit (LC), and post-shipment finance compare:

How repayment works (and what happens if you’re late)

Here is how you handle the repayment and liquidation process:

Note that for credit taken before August 31, 2025, the RBI has provided extra flexibility to allow liquidation from any legitimate alternate source.

If you exceed these timelines without an extension, here is exactly what happens:

Interest rates spike retrospectively: Your bank will withdraw your concessional interest rate ab initio (from day one) and reprice the entire loan at much higher commercial rates.

PCFC crystallisation: Bank will crystallise a PCFC loan. Meaning the debt amount will be converted into Indian Rupees at the prevailing exchange rate.

Your credit profile takes a hit: Your account falls into the risk of becoming a Non-Performing Asset (NPA). This triggers recovery measures and makes it much harder to get export credit in the future.

Common mistakes with export packing credit

Export finance is tricky, and navigating it alone makes it even trickier. Take note of the following common pitfalls so that you stay on the right track:

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You’ve either faced this yourself or heard it from another exporter/freelancer:

Tracking cross-border payments isn’t simple.

Most times, you can’t “track” anything directly as the receiver. Your client’s bank (and your bank) can trace it — but you often need a reference first.

On top of tracking, exporters also worry about:

This guide explains how cross-border payments work, where costs hide, how long they really take, how SWIFT tracking works in practice, and what to do when money gets stuck — plus why Skydo can be a cleaner receiving setup for many exporters.

A cross-border payment is any transaction where the sender and receiver are in different countries.

So your client is the sender, and you’re the receiver — but before the money hits your Indian bank account, it may move through international payment networks (often SWIFT + correspondent banks), and then get processed by your Indian AD bank.

A good cross-border payments setup prioritises:

How cross-border payments actually move (the real route)

Your client instructs their bank to send money using your beneficiary details (name, account number/IBAN where relevant, and SWIFT/BIC for wires). For a SWIFT wire, the transfer is typically communicated using SWIFT customer credit transfer messaging like MT103 (or ISO 20022 equivalents). 

2) Intermediary/correspondent banks may get involved

If the sender’s bank doesn’t have a direct relationship with your bank, the payment may hop through one or more correspondent banks. Each intermediary may apply its own fees and processing timelines.

3) Indian AD bank credits you after checks

Once the funds reach India, your bank may run compliance checks (KYC/AML/sanctions screening + purpose/payment context). If all is clean, funds are converted (if needed) and credited to your account

Reliable for larger B2B payments — but often:

Great for SaaS/e-commerce and online checkout flows, but fees can be higher (gateway + cross-border + chargeback exposure + FX spread).

3) Local Collection Accounts (Virtual Accounts)

You get local bank details abroad (like US ACH rails). Often faster and more predictable than SWIFT, depending on provider/currency/country.

Amazon/other platforms pay out on their own cycles; reconciliation and export documentation become the bigger pain.

Fee instruction matters: OUR vs SHA vs BEN

On SWIFT wires, the sender can choose who bears charges:

This is a big lever for exporters: if you’re receiving wires, push large buyers toward OUR to protect your margins.

There isn’t one universal timeline — it depends on rail, corridor, cut-off times, intermediary chain, and compliance checks.

Typical timelines by method (practical view)

Real-time tracking for cross-border payments

What “tracking” means in the SWIFT world

SWIFT has a tracking layer called SWIFT gpi. For gpi-enabled flows, payments carry a UETR — a unique reference that works like a parcel tracking number. 

Key reality check:
Even if gpi exists, the receiver usually can’t see tracking unless:

Some banks do provide trackers using the UETR. 

SWIFT Go is designed for low-value cross-border payments (consumer/SME use cases) and supports transfers up to $10,000 equivalent — but it only applies if the banks involved offer it. 
So it’s not the default answer for exporter wires.

Ask your client for this first (best-to-have):

Documents exporters typically need (practical set)

How to choose a cross-border payment partner (

Skydo is built for Indian exporters and freelancers who want a receiving setup that’s predictable: clear fees, clear FX, and clear payment status.

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