AR and AP Management (2) Flashcards
Where is the risk of default higher?
On exports compared to domestic sales. Therefore credit limit may be longer
What does the exporter need to consider?
The method of payment both with a view to minimising default risk and to financing the export
Bill of exchange?
A document drawn by the exporter and sent to the customer, who signs to accept responsibility to pay the amount specified on the stated date.
What may exporter choose to do in bill of exchange?
Hold the bill until maturity (and then receive payment from the customer)
Discount the bill with a bank to receive the cash earlier
What is forfaiting?
Bank discounting a series of bills of exchange without recourse to the exporter if the customer does not pay
Non-recourse aspect of forfaiting?
An attractive arrangement for businesses, but as a result the cost of forfaiting is relatively high
Issue with forfaiting?
Usually only available for large receivable amounts
What is a letter of credit?
A payment guarantee backed by one or more banks
Advantages of letter of credit?
Letters of credit also give security to the importer
Give no risk if exporter complies with T&C
Disadvantages of letter of credit?
Take a significant amount of time to set up before the sale occurs.
Not available for poor credit history
Purchasers must make payment must be made when due
Open account trading?
Simply trusting the customer to pay within the stated credit period with no additional collateral or security
Cash against documents?
Documents of title to the goods are not released to the customer until payment is made.
Export credit houses?
These organisations give credit to the overseas customer and guarantee payment to the exporter
Export merchants?
These organisations operate as intermediaries between the exporter and the overseas customer
Export credit insurance?
Protects against risks that could result in non-payment by a foreign customer
