Logan Letter Of Credit

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A letter of credit (L/C) is a great way mitigate the risk for Logan and his distributor. A letter of credit is contract that is moderated by third party, usually a bank, where the foreign buyer´s bank (here the UK based distributor), issues a written statement that he gives the payment to his bank once the exporter (here Logan) fulfills all the necessary terms and conditions stated in the contract. This kind of arrangement is in terms of risk avoidance superior to payment options such as prepayment or consignment. The reason for this is, that in prepayment the risk is on the importer´s side, because he has to pay before the goods are shipped. Therefore, he cannot be sure, if the products shipped are the ones he ordered. Any differences in terms …show more content…

Due to the letter of credit, there is no need to make business solely based on trust. Now you have neutral parties involved. There lies as well the benefit for Logan. If he was not completely sure about his distributor´s cash flow liquidity, he can now plan more safely, because the bank will vouch for him. The most important aspect is to ensure that he fulfills every single requirement of the export document to 100%. For example:
• a description of the merchandise,
• identification marks on the merchandise,
• evidence of loading (receiving) ports,
• name of the exporter (shipper),
• name of the importer, status of freight charges (prepaid or collect), and date of shipment. The letter of credit requires very sensitive expiration dates as well. Consequently, Logan needs to be very disciplined with his cash flow liquidity and to always be aware of possible supply bottlenecks. If these requirements are not met, the importer does not have to pay Logan. Furthermore, the documentation …show more content…

A consignment agreement is usually a contract that works in the favor of the customer rather than for the vendor. The crucial problem of the consignment agreement is that Logan, not the customer, ahs ownership of all consigned inventory until it´s used and invoiced. Because of that, Logan is exposed to several risks regarding his business. First and foremost, the inventory costs are a huge burden for his business, because he is basically financing the distributer´s inventory cost, until a sell is done. The dangers of having a low inventory turnover ratio, a key performance indicator for the sports goods industry, is very high. Especially if you consider that the distributer, contrary to Logan, does not have the pressure of time and sitting on expensive inventory. Therefore, Logan´s costs are not being transferred to the distributor. Furthermore, it is very probable that Logan has used a loan to finance his inventory, since it´s common practice. The yearly interest rate Logan pays on those loans can be broken down to a daily rate of interest. This means that every day that the distributor doesn´t sell inventory, costs will arise for Logan. Both because of the holdings costs of inventory and the time value of the loan. A different but also important risk factor is, that possible damages or obsolescence of exported goods, will affect Logan´s business directly. In addition, he does not have a

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