Question

Read The Question & Answer Give Your Opinion Do You Agree Or Disagree? Why Or Why Not?

Quenstion: Why is it more difficult and riskier to collect receivables from a foreign purchaser?

Answer: Collecting accounts receivable is a difficult task. Not doing background/credit checks leads to risk of non-payment when it comes to collecting from foreign countries. Since there is no personal contact, there is much less information available on the importer's creditworthiness and trustworthiness. Lastly, if collector is unable to collect the money, then legal actions can be taken however there are no courts with jurisdiction over international disputes and with international trade there are no shared commercial laws (David, 2013). In order to limit the international trade exposure, exporters can often request the importer to pay in advance prior to shipping the goods; this is known as cash in advance. Payment is made electronically where funds are transferred from the importer’s bank to the exporter’s bank. This method diminishes all possible risks for the exporter, no currency fluctuation that can affect the value of the contract, no cash flow issues, no collections issues, and no exposures since it’s transferred to the importer. Importer’s are at risk of not receiving the products, not receiving the right amount of products and even damaged products (David, 2013) One method of doing this is forfaiting. Forfaiting involves the purchase of foreign accounts receivable from the seller by a forfaiter. The forfaiter takes on all of the credit risk from the transaction (without recourse) and therefore the forfaiter purchases the receivables from the seller at a discount. The purchased receivables become a form of debt instrument (such as bills of exchange), which can be sold on the money market. Having some type of insurance and a thoroughly contract where a legal team can take a look at can also help with issues collecting receivables. Since there is a lot of scam done overseas it makes it difficult to trust especially when it comes to large figure numbers in the global chain market nowadays.

Answer 1

This is a good answer. I would like you to add the following:

In order for the seller to avoid the risk of non-collection and for the buyer the risk of non-receipt of goods, the two parties can use letter of credit, which is an instrument issued by the buyer's bank. The sellier routes the shipment documents through his/her bank to the buyer's bank after making the shipment and the buyer's bank releases the documents to the buyer after the buyer makes the payment. This procedure is governed by international conventions and is much safer for both the parties as compared to a clean credit or an advance payment.