Texas Computers (TC) recently began selling overseas. It currently has 30 foreign orders outstanding, with the typical order averaging $2,500. TC is considering the following three alternatives to protect itself against credit risk on these foreign sales:
Request a letter of credit from each customer. The cost to the customer would be $75 plus 0.25% of the invoice amount. To remain competitive, TC would have to absorb the cost of the letter of credit.
Factor the receivables. The factor would charge a nonrecourse fee of 1.6%.
Buy FCIA insurance. The FCIA would charge a 1% insurance premium.
a. Which of these alternatives would you recommend to Texas Computers? Why?
b. Suppose that TC's average order size rose to $250,000.
How would that affect your decision?