Question

Your business provides CDs on learning English that compliment the teaching that is provided by your employees based in Mexico. Assume that you decide to capitalize on these CDs by selling them to a large retail store based in Mexico. The CDs are not as effective without the teaching, but can be useful to individuals who want to learn the basics of the English language. You do not want to take the risk of sending a case of CDs to the retail store unless you can be sure of receiving payment. Explain how you can ensure payment for the CDs.

Answer 1

The following strategies can be implemented to ensure payments for the CDs:

1. An initial margin of say 30% can be maintained where the retailers will pay some pre-determined rate of the value of CDs taken and will keep paying the rest as and when sales occur. The best interest for the company would be to receive the entire payment just as the CDs are delivered to the retailer. However, this is not practical in this industry due to fluctuating demand. My company can then initiate a Letter of Credit for the remaining amount from an agreed upon bank.

2. A "pre-payment guarantee" can be initiated in my company and the retailer's agreement where the payment is collateralized or backed by some agreed upon asset in case of default. The asset must be worthy to the retailer and match the value of CDs delivered.

3. The company may appoint a reliable outsider, say a Bank or suitable private company, who will be responsible to maintain the sales and billings continuously and collect all payments on behalf of our company. The outsider will then update us with sales status regularly and pay the due amount to us after cutting their commission.

4. Offering Incentives and discounts can be offered to the retailers in many ways. One such example is granting a discount of 5% if payments are received within 7 days, while the normal payment term is say 30 days or granting favorable delivery to the retailers who promote timely payment. Upfront payment must be ensured as far as possible.

The methods that give the maximum guarantee for payment are those that are backed by a reliable third party, for example, a financial institution or by law.