1. Florida B.P.
found it challenging to manage the production and shipping
expenses related to exporting overseas. After meeting with its chosen bank, it
decided to include a 10 percent advance payment in its export contracts to assist
with this challenge. What other strategies could the company implement to assist
with managing expenses related to exporting overseas?
1) Open Account
Goods are shipped and delivered before the invoice deadline.
Most advantageous for the importer in terms of cash flow cost
Highest risk for the exporter (seller)
Exporter offers competitive open account terms
Exporter can mitigate the risk of non-payment by using export credit insurance.
Can help win customers (importers) in competitive markets
Global economics becoming more integrated, banks can provide value through
supply chain finance (SCF)
The key disadvantage of the open account approach is that the exporter faces the
liabilities, while the importer benefits from the delayed use of the company’s cash
capital and is therefore liable for the price involved in the products.
Some risks of Open account are, example – insolvency and political turmoil.
Open account may be offered by use of following trade finance techniques
a. Factoring – a credit arrangement where the enterprise sells its accounts
receivable to a third party at a reduced cost (discount)
b. Bank Payment Obligation – Irrevocable (under certain conditions) duty of an
obligator bank to pay a given amount to a receiving bank as soon as matching
occurs between data extracted from different trade documents such as invoices,
purchase orders, transport documents and certificates.
2) Document Against Payment (Sight Draft Collection)
A sight draft is a payment document method which is sued in international trade
where the importer (buyer) accepts shipped goods and agrees to pay the exporter
(seller) immediately upon delivery.
It is a type of bill of exchange.
Sight drafts are utilized in international trade to facilitate short-term financing
between importers and exporters.
There are no time delays or waiting period with a sight draft
They are generally accompanied by an official letter of credit issued by commercial
banks.
3) Document Against Acceptance (Time Draft)
Time between acceptance and maturity is also known as usance or tenure.
Type of payment document where an importer accepts shipped merchandise and
promises to pay the exporter at a specified future date
A type of short-term credit used to finance international transactions
Guaranteed form of payment to the seller by an issuing bank
It gives importer time to pay for goods received from the exporter.
4) Letter of Credit
A letter of credit is a signed undertaking by the bank on behalf of the importer
(applicant), agreeing to effect payment in favor of the exporter (beneficiary) up to a
specified amount of cash within a specified time frame and against specified
documents.
Letter of Credit is also referred to Documentary credit.
Letter of credit are often used within the international trade industry.
There are many different letters of credit including one called a revolving letter of
credit.
Banks collect a fee for issuing a letter of credit.
Banks act as a risk mitigator.
Letter of credit can be of different types
a. Revocable
b. Irrevocable
c. Confirmed
d. Unconfirmed
e. Transferrable
Sometimes a letter of credit may be a combination of confirmed and irrevocable
letter of credit.
2. Florida B.P. chose to use a debt collection agency to attempt to recover payment
from Fraser Transport in Scotland. What alternative options could it have
pursued to resolve the outstanding amount?
Florida B.P. was too confident entering an international market which led to the
failure of the first attempt in Scotland. They had minimal options to recover the debt
but could have chosen other ways apart from the international debt collection
agency.
Letter of Demand
A "Letter of Demand" is a legal document that involves legal action if the late party
does not settle their debt. The letter should include information about the payment
amount and consequences if the addresser fails to pay. It has to be clear that the
creditor intends to take legal actions.
Visit the client
One of the Florida B.P. managers should have travelled to Scotland to negotiate with
Fraser Transport in person and suggest a flexible payment package if they were
having financial problems at the time. When people have problems, they tend to
neglect emails, and an informal conversation will also help both parties understand
what is going on.
A Business Reporting Bureau
Florida B.P. can file a complaint against their client. The Business Bureau can take
action by reporting the complaint publicly, which will damage the company's
credibility, forcing the company to come forward and clarify the situation in detail.
Arbitration, Mediation, Court.
The organization should have pursued Mediation or Arbitration, two forms of
alternate dispute resolution that can help avoid the high cost and predictability of a
lawsuit. It assists all parties in establishing their own ground rules for resolving their
disagreement by mediation or arbitration.
Trade Credit Insurance
Florida B.P. could have obtained a Trade Credit Insurance in advance, which would
have minimized the risk of non-payment by an importer as if the latter fails to do so,
the insurance covers up to 100% of an invoice.
3. When searching for a bank or financial institution to provide assistance in
exporting internationally, what process should Florida B.P. have followed?
Florida B.P. after its initial losses incurred in trade got the hold of understanding the
importance of financial institutions or banks to ensure smooth export of its product with
accomplishing monetary demand mentioned in the sales contract. Market research
plays an important role to choose the institution which provides facilities both in the
favor of the importer and exporter like extended payment terms, advance payments,
issuing a letter of credits, and documentary collections.
Extended payment terms & rate of interest - Banks can usually provide extended
payment terms of around 270 days which is equivalent to approximately 10 months
and that helped Florida BP to undertake big consignment orders, also in usual cases
rate of interest is quite low i.e. 6% for such credit and it provides freedom to the
company in procurement of initial expenses like raw materials, labor etc.
Post shipment finance - Bill discounting/Bill Negotiation - Exporters' financial aid
after exports is offered by banks with a low interest rate in the form of bill discounts
and negotiations. This financial assistance also encourages exporters to
acquire/produce new export goods for the next export shipment. The exporter
submits all necessary documentation to be sent to the buyer overseas when the
export shipment procedures have been completed. When a buyer and seller export
sales agreement is based on credit, the exportation bills are usually submitted to the
buyer on maturity date for receipt of payment negotiated upon on each other. If the
exporter needs funding to be provided for the coming export shipments, it will apply
by discounting the export bills already exported to finance post shipments. The
negotiating protocols for the availability of post shipping financing are practised in
the case of Letter of Credit (LOC).
Finance up to 90% of FOB value of exports - The majority of banks provide financial
assistance for exporters up to 90% of the FOB value of exports on the basis of the
government's instructions to raise exports. Any of the banks offer a 100% export
value for money with a narrow government-based interest rate.
4. Florida B.P. has become more competitive through offering flexible payment
options and extended financing terms to clients; however, it is continuing to price
contracts in U.S. dollars, which is disadvantageous to buyers. What other
strategy could it use to minimize its foreign exchange risk and become more
competitive? Give reasons for your answer.
Instead of Florida B.P accepting payments in U.S dollars, which is disadvantageous to the
buyers, it can offer to accept payments in Euros provided it is hedging the price volatility of
the exchange rates.
Hedging is used by every importer/exporter to mitigate losses. It is used by both the parties
to overcome the negative impact of price volatility. In case of hedging in the foreign
exchange market, both importer and exporter try to protect themselves from unexpected
currency moves, creating a forex hedge. An importer will go long on the foreign currency
and the exporter will go short on his home currency and vice versa.
Perspective of Importer (long on foreign currency)
Suppose Importer is purchasing biodiesel worth $10000 on January 1 st, 2021, where
EUR is 100, wants protection against a possible appreciation in Eur on April 1 st, 2021
supposing EUR becomes 110. He would buy $10000 worth of EUR on January
1st,2021 and go long on the foreign currency. If he does not hedge, he would incur
loss worth EUR 100000. To avoid these losses, he sells off the $10000 worth $11000
on April 1st, 2021 there by making a profit of $1000. Hence making his net loss EUR 0.
Perspective from exporter (long on foreign currency)
Suppose Florida B.P is exporting biodiesel worth US $10000 on January 1 st, 2021,
where EUR is 100, wants protection against a possible appreciation in EUR on April
1st, 2021 supposing EUR becomes 110. He would buy EUR worth 1000000 on January
1st,2021 and go long on foreign currency. If he does not hedge, he would incur losses
worth $1000 making value of his goods become $9000. To avoid these losses, he
sells off the EUR 1000000 worth EUR 1100000 on April 1st,2021 there by making a
profit of EUR 100000 per $1000. Hence making his net loss $0.
