Sunrise Spices imports ingredients from another country and sells packaged products to local shops. A new overseas supplier has offered a large order of car...
Question 1 Report
Sunrise Spices imports ingredients from another country and sells packaged products to local shops. A new overseas supplier has offered a large order of cardamom, but requires payment before dispatching the goods. Sunrise Spices does not know the supplier well. Its bank offers a trade-finance service in which the bank promises payment to the supplier only when agreed shipping documents are provided. The business manager says this service may cost more than making a simple internet transfer, but it could make the supplier more willing to accept the order. The manager must decide which option is suitable because the business does not want to send money for goods that are never dispatched.
(a) Which one of the following describes the bank's role in this trade-finance arrangement: it gives a payment guarantee, it sells shares, or it collects shop cash? Select your answer. [2]
(b) Which reasons explain why the overseas supplier may prefer a bank-backed payment guarantee? [3]
(c) Which reasons explain why Sunrise Spices may prefer this service to sending all the money directly in advance? [3]
(d) Which documents or evidence should Sunrise Spices ask the bank to require before payment is made? [3]
Answer Details
(a) The bank’s role is to give a payment guarantee. [1] It promises to pay the supplier when the agreed conditions, such as providing specified shipping documents, are met. [1]
(b) The overseas supplier may prefer this arrangement because it has greater confidence that it will be paid. [1] A bank is a trusted financial institution, [1] so the supplier may be willing to dispatch the goods sooner and have less concern that an unfamiliar new customer will not pay. [1]
(c) Sunrise Spices may prefer the service because payment can depend on evidence that the goods have been dispatched. [1] This reduces the risk of paying in advance for goods that are never sent. [1] The bank checks the agreed documents and provides a formal record of the arrangement. [1]
(d) The bank should require a shipping document or bill of lading, [1] an invoice, [1] and a packing list. [1] Evidence of dispatch and evidence that the agreed quantity or product specification has been met are also valid. These documents link payment to evidence that the supplier has sent the cardamom specified in the agreement.
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