Accounts Receivable and Blades
1. Assuming that banks in Thailand issue a time draft on behalf of Sports Equipment Inc. and Major Leagues Inc. , would Blades receive payment for its roller blades before it delivers them? Do the banks issuing the time drafts guarantee payment on behalf of the Thai retailers if they default on the payment? ANSWER: No, Blades would not receive payment before it delivers roller blades to Sports Equipment Inc. and Major Leagues Inc. if banks in Thailand issue a time draft on the retailers’ behalf. The usual time of payment under a time draft is the maturity of the draft, and Blades relies on the retailers to pay the drafts at maturity.
No, the banks issuing the time drafts do not guarantee payment on behalf of the Thai retailers if they default on the payment. The draft merely represents Blades’ formal demand for payment from the buyer and affords Blades’ less protection than a letter of credit, since the banks are not obligated to honor payments on the buyer’s behalf. 2. What payment method should Blades suggest to Sports Gear Inc.? Substantiate your answer. ANSWER: Blades should suggest to Sports Gear Inc. that its bank issue a letter of credit on its behalf.
In a letter of credit, the bank is substituting its credit for that of the buyers, and Blades would be assured of receiving payment from the issuing bank as long as it presents the necessary documents in accordance with the L/C. The issuing bank is then obligated to honor drawings under the L/C. On the other hand, Sports Gear Inc. does not have to pay for the goods until shipment has been made and documents are presented in good order. 3. What organization could Blades contact in order to insure its sales to the Thai retailers? What type of insurance do these organizations provide?
ANSWER: Blades could contact the Export-Import Bank of the U. S. (Ex im bank), which provides insurance protection against the risk of nonpayment by foreign buyers. Under such insurance coverage, Ex im bank will reimburse Blades between 90 and 100 percent of the insured amount, depending on the type of policy and buyers. 4. How could Blades use accounts receivable financing or factoring, considering that it does not currently have accounts receivable in Thailand? If Blades uses a Thai bank to obtain this financing, how do you think the fact that Blades does not have receivables in Thailand would affect the terms of the financing?
ANSWER: Blades could use accounts receivable financing and factoring using its accounts receivable in the U. S. Using accounts receivable financing, Blades could obtain a loan from a bank that would be secured by an assignment of the accounts receivables. Using factoring, Blades could sell the U. S. accounts receivable to a factor. Either approach is probably available to Blades if it decides to use a U. S. bank. However, it could also attempt to conduct accounts receivable financing of factoring of its U. S. receivables using a bank in Thailand.
Thai banks may consider the assignment of foreign receivables less attractive than the assignment of domestic receivables and may require high interest rates (accounts receivable financing) or discount the receivables heavily (factoring). 5. Assuming that Blades is unable to locate a Thai bank that is willing to issue an L/C on Blades behalf, can you think of a way Blades could utilize its bank in the U. S. to effectively obtain an L/C from a Thai bank? ANSWER: Blades could inquire whether its U. S. bank has a correspondent bank in Thailand. In that case, the Thai bank may be willing to accept a letter of credit issued by Blades’ U.
S. bank on Blades’ behalf. 6. What organizations could Blades contact to obtain working capital financing? If Blades is unable to obtain working capital financing from these organizations, what are its other options to finance its working capital needs in Thailand? ANSWER: There are several organizations Blades could contact to obtain working capital financing. For example, the Ex im bank’s Working Capital Guarantee Program encourages commercial banks to extend short-term financing by providing a comprehensive guarantee that covers 100 percent of the loan’s rincipal and interest. Furthermore, the Overseas Private Investment Corporation (OPIC) will provide medium- to long-term financing to U. S. investors undertaking an overseas venture. If Blades is unable to obtain working capital financing from these organizations, it could ask its bank for a short-term loan that finances the working capital cycle that begins with the purchase of inventory and continues with the sale of the goods, creation of an account receivable, and conversion to cash.