Free Online Course in International Business

Knowledge Statement

Knowledge of Forms of Short-term Financing:  Credit Insurance, Government-supported Finance, Discounting

Activity

Take the following financing options and group them together in similar risk groups and then rate them according to risk level starting with the highest risk for the seller moving to the lowest risk.  This particular risk rating will correspond to the lowest risk for the buyer moving to the highest risk to the buyer. 

HIGHEST RISK                                                                                 LOWEST RISK

     SELLER                                                                                               BUYER

LOWEST RISK                                                                                  HIGHEST RISK

Bankers acceptances

Bank financing

Commercial Letter of Credit

Documentary collections

Ex-Im Bank

Export credit insurance

Factoring

Forfaiting

Personal resources    

SBA

Standby letters of credit

Transferable letters of credit

Vendors         

After ranking the risk, provide the minimum requirements necessary for the seller to utilize each form of financing and their associated costs. 

Answer

Assessment

1.                     Having sufficient collateral on your balance sheet is the basis for most financing. Which of the following is considered collateral?

a.      sales and inventory

b.      inventory and accounts receivable

c.       accounts receivable and inventor

d.      sales and cost of sales

2.                     Factors will discount foreign accounts receivable if they meet certain requirements.  Which of the following best describes without recourse?

a.      The factor buys the invoice (account receivable) and will collect from the issuer of the invoice if the buyer does not pay.

b.      The factor buys the invoice (account receivable) outright and takes full responsibility for the collection of the invoice.

c.       The invoice is avalized by the buyer’s bank which guarantees the payment of the invoice to the factor. 

d.      Factors can never collect from either the buyer or the seller if the invoice is sold to the factor without recourse. 

3.                     What best describes what happens when a bank accepts to pay on an accepted draft under a letter of credit even if any discrepancies exist?

a.      The buyer’s bank accepts the documents because of discrepancies in the documents and the buyer’s refusal of the same discrepancies.

b.      The buyer’s bank agrees to guarantee payment under a letter of credit to the seller at a future date after the buyer is given title to the goods by the release of documents (negotiable or nonnegotiable) and having received the acceptance of any discrepancies by the buyer if present.

c.       The buyer’s bank agrees to guarantee payment against an accepted draft under a documentary collection where the buyer only has accepted responsibility to pay the draft presented at maturity.

d.      The buyer agrees to payment to the seller at a future date after the buyer is given title to the goods by the release of documents (negotiable or nonnegotiable) and has accepted the terms to pay at maturity by signing the draft presented.

4.                     Which of the following best describes the parties and the transaction activity in a transferable letter of credit?

a.      Only the broker relying on the credit of the buyer in the form of a letter of credit to guarantee payment to the broker if documents are presented in strict compliance with the letter of credit and the seller presents his documents to the broker under a documentary collection.

b.      Documents are presented under a letter of credit between the buyer and the seller where the broker in the transaction accepts an assignment of proceeds in order to claim his or her commission.

c.       Documents presented under a letter of credit with a time draft are accepted for payment by the buyer’s bank after all discrepancies in the documents are accepted by the buyer.

d.      The buyer and the seller have a middle man (broker) who relies on the credit facility of the buyer in the form of a transferable letter of credit and transfers it to the seller, who being a party to the original letter of credit, is guaranteed payment provided there is strict compliance with the letter of credit.

(Correct answers: 1=c, 2=b, 3=b, 4=d)