Your sales person has brought you two sale opportunities, and you can only pick one to work on.
Background: You have no cash and will need to borrow money to complete the transaction.
Line of credit borrowing is at 5% annually.
FX forward contracts are 1.5% of value for total value of the sales contract.
Letter of Credit Discount Rates will be 2.5% of value.
Accounts Receivable Insurance premium for open terms are 0.65% of the total receivable for USA, and 1.65% for Mexico.
Opportunity #1: Customer is located in the United States. Sale will be for $1,250,000 USD, open terms N180 days. It will take you 60 days to produce the products for this customer. Costs during Production are 100K per week.
Opportunity #2: Customer is located in Mexico. Sale will be for $1,500,000 (as of today’s exchange rate), in Mexican Pesos. The buyer will post a $200,000 Letter of Credit, and wants the balance to be on open terms, Net 30. It will take you 14 days to produce the products. Costs during Production are 50K per week.
Questions:
1. Identify the pros and cons of each opportunity. Be sure to discuss the following for each opportunity – plus any other perceived differences. This is your risk analysis of each opportunity.
a. Country overview and risks
b. Any foreign exchange
c. Payment type risk for each
d. How much will you estimate you will need to borrow in each opportunity?
2. Based on the assessments above, which opportunity do you take? Why did you choose that opportunity? What other factors will you take into account? Is there anything you would try to change?
3. Please prepare a 1 page business plan you will present to your banker for the financing request. Think of what they will want to see. You can make up details about the product, industry and your financial positon. If there are risks, indicate how you will mitigate them. After reading this business plan, the bank should have enough information to make a decision.