Anand Export House: 60-Day Credit from a Kenyan Buyer
Anand Export House in Kolhapur has a confirmed order for 1,200 hand-stitched leather bags from a buyer in Nairobi, Kenya. The order value is USD 42,000; production cost is ₹22 lakh; the buyer wants 60 days credit after shipment. Anand has ₹6 lakh free cash and a ₹10 lakh cash-credit limit, of which ₹4 lakh is unused. Raw material suppliers want 30% advance because leather prices rose. His bank offers a letter of credit facility, but the Kenyan buyer refuses to open an LC, citing charges and delay, and proposes documentary collection (D/P) instead. Anand's export-credit insurance policy covers 75% of loss but requires credit-limit approval before shipment. The buyer has placed three smaller orders in the past, all paid late by 10-15 days. Anand must decide whether to accept D/P, demand an LC, or seek another arrangement.
1. Compare the payment-risk and cash-flow implications of documentary collection (D/P) and an irrevocable letter of credit for Anand.
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Documentary collection (D/P): The bank presents documents to the buyer and releases them only against payment. The bank does not guarantee payment; if the buyer refuses, the goods may sit at the port, incurring demurrage and storage. It is cheaper and simpler than an LC, but the exporter carries the buyer's credit risk. Cash comes only after the buyer pays, so Anand's working-capital gap persists for 60 days plus transit. Irrevocable LC: The issuing bank undertakes to pay against complying documents, so the risk shifts to the bank (subject to country and bank risk). Anand can also negotiate/discount the LC, improving cash flow. The buyer refuses because of charges and delay. An LC is more expensive and document-strict; a single discrepancy can delay payment. Given the buyer's history of three late payments, D/P is weak protection. Anand should prefer an LC, or a substantial advance plus D/P for the balance, or D/P only with ECGC credit-limit approval and a backup buyer. The choice is not just cost; it is who bears the risk of non-payment.
2. Assess Anand's working-capital gap and suggest how he can finance the order without overstretching the cash-credit limit.
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Working-capital gap:
- Production cost = ₹22,00,000.
- Free cash = ₹6,00,000; unused cash-credit = ₹4,00,000; total = ₹10,00,000.
- Gap = ₹22,00,000 − ₹10,00,000 = ₹12,00,000, before the 30% supplier advance and before freight/insurance. Even if the CC limit were fully drawn, ₹10 lakh is not enough. Options:
- Pre-shipment/packing credit from the bank against the confirmed order and LC/contract; export credit is often at a concessional rate.
- Post-shipment bill discounting once documents are negotiated, but this arrives after shipment.
- Buyer's advance: negotiate 30% (₹12.6 lakh equivalent) before production; this directly closes the gap.
- ECGC-covered credit: get credit-limit approval before shipment, then use insured receivables to support bank finance.
- Reduce the order to 800 bags or phase shipment so the cash gap is manageable. Anand should not max out the CC limit and leave no buffer for the 30% supplier advance; he should arrange pre-shipment finance before buying leather.
3. What conditions should Anand insist on if he accepts the buyer's D/P proposal?
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If Anand accepts D/P, insist on:
- ECGC credit-limit approval in writing before shipment and confirm the policy covers the buyer and country; otherwise the 75% cover may not apply.
- A 25-30% advance by bank transfer, with the balance on D/P; this reduces exposure and funds raw material.
- Documents through banks, with the buyer's bank named and instructed to release only against payment; no direct documents to the buyer.
- Retention of title until full payment, and a clause allowing resale or return of goods at the buyer's cost if documents are refused.
- Partial shipments linked to partial payments, so one refusal does not strand the entire consignment.
- A named back-up buyer or return arrangement for the leather bags, and marine insurance.
- Clear demurrage/storage responsibility in the contract.
- Pre-shipment verification of the buyer's bank and a credit report. These conditions do not make D/P risk-free, but they stop Anand from carrying the entire loss alone.