Question

EastSide Tractors is an American firm that manufactures construction and farming machinery. A construction company in Germany has placed a large order for machinery, but has requested that EastSide Tractors modify the design and add a special feature. Which form of payment is EastSide Tractors most likely to request in order to minimize its risk?

Answer 1

Answer: Cash in advance

Explanation: Cash in advance is a type of payment that is used in some trade agreements.

This method of payment will require a buyer to pay the seller in cash before a shipment is received and sometimes before a shipment is even made.

Cash in advance is a strategic form of payment that can be used in any transaction in where there is a delay between the sales agreement and the sales delivery.

In the scenario given in the question, we can see that the German company has already placed an order, but the company has also caused a delay in the transaction by requesting for extra modifications.

This will prompt EastSide Tractors to feel the need to safeguard their interests in case the German company should default. This is why a Cash in advance payment system will come into play.

Answer 2

Answer:

in foreign trade companies use letters of credit (LC)

Explanation:

Ideally the seller wishes to get all the money in advance, but in the real world no buyer will pay you in advance. What the buyer does is issue a letter of credit (LC) through its bank.

A LC is issued by the buyer's bank and it guarantees that payment will be done after certain conditions are met. Generally this conditions refer to actually having shipped the goods and comply with all the documents required by the buyer and the bank.

LCs are used in foreign trade because the banks guarantee that both the seller will get paid and the buyer will receive the goods. The bank itself doesn't verify the goods, other companies are hired to do so, e.g. SGS, Bureau Veritas, etc.