Ensuring Payment for Products Exported by the Sports Exports Company

The Sports Exports Company produces footballs and exports them to a distributor in the United Kingdom. It typically sends footballs in bulk and then receives payment after the distributor receives the shipment. The business relationship with the distributor is based on trust. Although the relationship has worked thus far, Jim Logan (owner of the Sports Exports Company) is concerned about the possibility that the distributor will not make its payment.

Questions:

1. Explain in detail precisely how Logan could use a letter of credit to ensure that he will be paid for the products he exports? What type of risk is Logan managing by doing this and how does the letter of credit accomplish this?

2.Logan has discussed the possibility of expanding his export business through a second sporting goods distributor in the United Kingdom; this second distributor would cover a different territory than the first distributor. The second distributor is only willing to engage in a consignment arrangement when selling footballs to retail stores. Explain the risk to Logan beyond the typical types of risk he incurs when dealing with the first distributor. Should he pursue this type of business and why do you think so?