Question

Assume that the 60-day payment terms that you gave your buyer are typical, and that you will be required to carry up to $2,500,000.00 per month in accounts receivable for export sales. To be able to produce inventory for additional sales while while you carry 60 days of accounts receivable, you are going to need to find an outside source of additional export working capital. Discuss in detail two different options for financing export working capital to keep production going while you wait for payment from the last 60 days of sales.

Answer 1

THE FIRST OPTION IS : LETTER OF CREDIT (LC)

LC : Letters of credit are used to provide credit in international payment transactions.

A letter of credit is an agreement in which the buyer’s bank guarantees to pay the seller’s bank at the time goods/services are delivered.

Once the buyer and seller agree to do business, the buyer requests for a letter of credit from the issuing bank to ensure that international transaction is secure and guaranteed. Once the seller ships the goods (in accordance to the contract), the issuing bank sends the Letter of credit to the advising bank.

Once goods are delivered and a request for payment is made, the issuing bank pays this amount to the seller’s bank. Finally, the issuing bank obtains the payment from the buyer and releases documents so that the buyer can now claim the goods from the carrier.

SECOND OPTION IS : WORKING CAPITAL LOAN

To carry on regular produciton activity, businesses do take working capital loan. This is short term in nature. when you export, you need money to produce inventory for additional sales. only thing important is to see that working capital loan should be available as less than our cost of capital.

THIRD OPTION IS : BILL OF EXCHANGE

Generally, a bill of exchange is used in international trade activities where one party will pay a fixed amount of funds to another party at a predetermined date in the future.

The bill of exchange will facilitate a line of credit for international traders. The party who writes up the bill of exchange is known as the drawer, and the party that is to pay the sum of money is known as the drawee. The drawee will accept the terms laid out in the bill by signing it, which will then convert this into a binding contract. The seller can discount their bill of exchange with the bank and obtain immediate payment. The bank will then obtain the funds from the drawee. A bill of exchange facilitates secure transactions by ensuring that the bank will accept the bill of exchange written up by drawee, which means that the seller will receive the funds regardless of whether the buyer pays or not.

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