Accounts Receivable and Blades

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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...
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