Free Online Course in International Business

Knowledge Statement

Knowledge of Methods of Payment: Letters of Credit, Documentary Collections, Cash in Advance

Activities

Instructions for the Instructor:

1.                     Select a product the class would be interested in buying/selling.

2.                     Identify the country of origin of the product and a country of destination.

3.                     Discuss the political and economic situations of each country.

4.                     Divide the class in half with one side being the importer and the other the exporter. 

5.                     Moderate a negotiation between the two sides as they try to secure the best method of payment for their company based on the scenarios provided. Remember to play devil’s advocate for both companies.

Scenario 1

The importer is a new company with little importing experience.  The exporter has been involved in international business for ten years.

Optimum Outcome

While it is important to take into consideration the political and economic environment of both countries, based on the content information the best solution for an exporter would be 100% prepayment. Prepayment would be the worst outcome for the importer.  A compromise with a percentage due prepaid and the remaining due at invoice date or on open terms would be less risky to the importer and still provide cost coverage for the exporter.

A new company with little international experience may have no business credit and pose a significant risk to an exporter. A compromise of part of the invoice prepaid and part on open terms reduces the risk for an importer, provides expense coverage for an exporter, and relies on this exporter’s experience and cash flow to support the growth of  his/her business.

Scenario 2

An importer and exporter have been doing business together for five years. Over that period of time there have been three instances where this exporter has shipped late and the importer has had cash flow problems.

Optimum Outcome

While it is important to take into consideration the political and economic environment of both countries, based on the content information and this particular scenario, the best solution would be a letter of credit.  Because both parties have experienced performance problems, there may be issues of trust. However, the parties do have an established relationship which may push them to agree to an L/C with terms, or a documentary collection to avoid the high bank fees.

Scenario 3

An importer is a well-established company that buys products from around the world. The exporter is a small company new to international business.

Optimum Outcome

While it is important to take into consideration the political and economic environment of both countries, based on the content information and this particular scenario, the best solution would be a percentage of the order prepaid and the remainder on a documentary collection. In this scenario, the exporter will need cash to manufacture since it is a small company and with little international experience will be hesitant to ship on open terms.  As a newcomer to export, a letter of credit may be expensive and difficult to fulfill correctly. A documentary collection provides reduced risk for the importer and exporter while avoiding the cost and resources required in a letter of credit.

Scenario 4

Change the product and countries. Work through Scenarios 1-3 again.

Optimum Outcome

The answers may change based on the political and economic situation with in and between the countries involved in each scenario.

Assessment

1.                     As an exporter requesting Cash against documents for the payment terms on their international transaction. The exporter is not required to include a _____________________ along with the export documents.

a.      shipper’s export declaration

b.      bill of exchange

c.       commercial invoice

d.      packing list

2.                     A letter of credit reduces credit risk to the exporter by

a.      allowing the exporter to ship any product they have available to the importer once the letter of credit  is received.

b.      requiring the importer to pay all of the banking charges for the letter of credit .

c.       allowing the importer to accept more than they ordered and that is identified in the letter of credit.

d.      requiring the importer to pay should the exporter comply exactly with the terms and conditions of the  letter of credit.

3.                     Open account payment terms is the best option for an international transaction

a.      in every situation and in every market.

b.      only when the importer is a new company.

c.       when a long-term relationship has been established.

d.      when the exporter has been doing business for many years.

4.                     Cash in advance or prepayment provides reduced risk to the

a.      importer

b.      broker

c.       banks

d.      exporter.

(Correct answers: 1=b. 2=d, 3=c, 4=d)