Question

Japanese manufacturer (the seller) of optical zoom attachments has signed a contract with a Mexican company (the importer) to supply 10,000 attachments for a contract price of USD 1.2 million, Following multiple discussions, the Japanese company has sought a 10 percent advance payment to help the company secure funds for purchasing raw materials and to ensure the commitment of the buyer. Given this is the first contract between these two companies, the Mexican company has asked for a 5 percent performance guarantee to ensure appropriate delivery on their agreement. Explain how a buyer can use the advance payment and performance guarantee to their benefit.

Answer 1

Buyer can use a performance guarantee and advance payment to his own advantage through-

A.it will be providing the buyer with an assurance of completion of the contract within the stipulated period of time and within the specified terms and condition.

B. Advance payments which are made by the buyer will be helping him in order to gain a upper hand while negotiating further through this contract because he is paying the manufacturer in advance for his contract and that will be losing time value of money on the advance payments in order to gain an upper hand in negotiations in future .

C. It can secured him from fluctuation of the foreign exchange markets because they are transacting in foreign Markets and it is a Mexican company who is trying to buy the Japanese goods.

D. Buyer can also eliminate the risk of defaulting on that portion of credit because he would be paying them in advance and it will also offer him with flexibility and future.

E it would help the buyer in gaining through further contracts with the same supplier and getting a reputation that he has the sound creditworthiness.

F.it will increase the credibility of the buyers in the foreign Markets and it will also increase the probability of raising foreign supply at credit.