Question

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Quenstion: Why is it more difficult and riskier to collect receivables from a foreign purchaser?

Answer: Collecting accounts receivable is a difficult task. Not doing background/credit checks leads to risk of non-payment when it comes to collecting from foreign countries. Since there is no personal contact, there is much less information available on the importer's creditworthiness and trustworthiness. Lastly, if collector is unable to collect the money, then legal actions can be taken however there are no courts with jurisdiction over international disputes and with international trade there are no shared commercial laws (David, 2013). In order to limit the international trade exposure, exporters can often request the importer to pay in advance prior to shipping the goods; this is known as cash in advance. Payment is made electronically where funds are transferred from the importer’s bank to the exporter’s bank. This method diminishes all possible risks for the exporter, no currency fluctuation that can affect the value of the contract, no cash flow issues, no collections issues, and no exposures since it’s transferred to the importer. Importer’s are at risk of not receiving the products, not receiving the right amount of products and even damaged products (David, 2013) One method of doing this is forfaiting. Forfaiting involves the purchase of foreign accounts receivable from the seller by a forfaiter. The forfaiter takes on all of the credit risk from the transaction (without recourse) and therefore the forfaiter purchases the receivables from the seller at a discount. The purchased receivables become a form of debt instrument (such as bills of exchange), which can be sold on the money market. Having some type of insurance and a thoroughly contract where a legal team can take a look at can also help with issues collecting receivables. Since there is a lot of scam done overseas it makes it difficult to trust especially when it comes to large figure numbers in the global chain market nowadays.

Answer 1

Answer:-

Company's often feel that collecting receivables from foreign purchasers is much morerisky and difficult because of a few reasons. First, there is a lack of contact since foreignpurchasers are located in a different country. Foreign transactions are usually conductedelectronically whether it is email, fax, phone, and FaceTime therefore there is no sense ofconnection or unable to evaluate the importer. Second, since there is no personal contact,there is much less information available on the importer's creditworthiness andtrustworthiness. With lack of trust, exporter's can fear of not receiving payments. Third, ifimporter fails to pay, exporter will now have to hire foreign collectors which can be fairlyexpensive and difficult. Lastly, if collector is unable to collect the money, then legalactions can be taken however there are no courts with jurisdiction over internationaldisputes and with international trade there are no shared commercial laws (David, 2013).