Methods of Payment/Activities
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Unit 4.1-Methods of Payment |
Introduction | Cash in Advance | Documentary Collections | Letters of Credit | Open Account | Combining Methods | Summary | Resources | Activities | Assessment |
Activity edit
Instructions for the Instructor: edit
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 edit
The importer is a new company with little importing experience. The exporter has been involved in international business for ten years.
Optimum Outcome edit
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 edit
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 edit
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 edit
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 edit
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 edit
Change the product and countries. Work through Scenarios 1-3 again.
Optimum Outcome edit
The answers may change based on the political and economic situation with in and between the countries involved in each scenario.