Techniques of payment (risk for buyer)
| 1. | Cash-in-Advance | + | + | + | + | + | + | + | + | + | (0.9) | maximum risk | |
| 2. | Letter of Credit | + | + | + | + | + | |||||||
| 3. | Documentary Collection | + | + | + | |||||||||
| 4. | Open Account | + | (0.1) | minimum risk | |||||||||
| 5. | Special terms of Payment: - Factoring; - Forfeiting; - Leasing; - Export credits; - Project finance etc. | no estimation |
Figure 2.4
Cash-in-Advance - The buyer pays the seller before shipment of goods. Thus the buyer has a disadvantages he has not assurance to receive the goods or resave it proper time and he is tying up his capital before receipt of goods.
Letter of credit (Documentary credit) - L/C is widely used as financial instrument, because the risks between both parties are equal. L/C is defined by international laws and it secures full and punctual payment. They are some kind of terms in L/C transaction:
- revocable or irrevocable
- confirmed or unconfirmed
- transferable
- payable
- red clause
- green clause
- Back-to-back.
Documentary collection – D/C instrument for settlement in national and international trade, all rules about D/C are carried out, and treated according international law. The D/C is having tow types: The first is D/P – Document against Payment Collection. The exporter ships the goods and gives the document to his bank, which will forward the document to the importer’s bank, along with instruction on how to collect the money from importer. The second is D/A – Document against Acceptance Collection. The exporter extends credit to the importer by using a time draft. The documents are released to the importer to claim the goods upon his signed acceptance of the time draft.
Open account – it is the method of payment the least risky for buyer, because buyer receive the goods than his is to pay for has already received goods.
I do not pay attention for the `Special terms of payment, because I do my research as the financing techniques for short-term and medium-term period. In the end, then I use special term of payment I use lot of special dates which is difficult transform in our future model.
The managers of corporation have to answer for two financial questions: What investments should the firm make? And how should it pay for those investments? The first question involves spending money; the second involves raising it. The main target of financial management, when they choose the project, is to increase value of firm. On the other hand, if managers are speaking about contracting they have the same indication as invest projects in the contracting. The first manager invests or spends money; the second manager has profit and it increase value of corporation. After several transformations and same assumptions I may understand the cross-border contract as invest project and I try to use methods investment decision for the contract.
Figure 2.5