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An Australian business is negotiating an order with a new overseas customer - HSC - SSCE Business Studies - Question 11 - 2009 - Paper 1
Question 11
An Australian business is negotiating an order with a new overseas customer. Which method of payment would involve the greatest risk for the Australian business? (... show full transcript
Worked Solution & Example Answer:An Australian business is negotiating an order with a new overseas customer - HSC - SSCE Business Studies - Question 11 - 2009 - Paper 1
Step 1
Which method of payment would involve the greatest risk for the Australian business?
Answer
The method of payment that would involve the greatest risk for the Australian business is (A) Open account.
Explanation:
An open account allows the buyer to receive goods and pay for them later, creating significant risk for the seller. There is reliance on the buyer to pay within the agreed time frame, and there is little recourse for the seller if the buyer defaults on payment.
Comparison with Other Options:
- Letter of credit: This method provides a guarantee from the bank, thus reducing risk significantly for the seller.
- Bill of exchange: This is a written order by one party to another to pay a specific amount at a specified time, which also offers a level of security.
- Payment in advance: This requires the buyer to pay for the goods before they are shipped, eliminating payment risk entirely for the seller.
Thus, among the options provided, the open account presents the greatest risk.