Mammoth Manufacturing’s Credit Policy
The time lapse between the placement of a purchase order and the delivery thereof, coupled with an industry history of dramatic swings in the demand for goods and services, dictates that assurances for payment be established at the inception of each order. MMI believes that the time honored mechanism of a standby letter of credit is the most practicable means by which both buyer and seller can be protected if an order is for more than one container of hose. Conversely, if the order covers only one container of hose, a cash deposit would be more suitable.
In view of the foregoing, MMI has adopted the following policy:
- Orders for a single container of hose are to be accompanied by a cash deposit equal to 50% of the purchase order (including tax), to be applied to the payment due on delivery.
- Orders for more than one container of hose are to be accompanied by an irrevocable standby letter of credit in an amount that provides coverage for each successive container before it is shipped. For example, if ten containers are ordered, to be delivered at the rate of one container per week, and the delivery time for each container is three weeks, by the time the first container has been delivered, two more containers would have been shipped. Accordingly, the standby LC would need to be in an amount equal to the price of only three of the ten containers, provided prompt payment is made for each successive delivery.
- In lieu of a standby letter of credit, orders for more than one container of hose will be accepted if accompanied by a standing cash deposit equal to 50% of the amount required for a standby letter of credit (as calculated in the above example). Thus, for the example shown in (2) above, the cash requirement would be 50% of the purchase price of three containers. As in the example of the ten container order secured by a standby LC, payment would be required upon the delivery of each successive container. The cash deposit would remain intact to be applied to half the price of the ninth container and to the full price of the tenth container.
In the event payment is not received for a delivery on or before the third business day following said delivery, payment will be drawn against the letter of credit, or the cash deposit as the case may be, and the remainder of the order will be canceled.
Special circumstances may arise from time to time that warrant modification of the foregoing requirements. Moreover, MMI expects to build its inventory in the U.S. as it becomes clear what the Industry’s future preference will be in terms of hose diameter and coupling design. It is expected that this preference will emerge as inferior and more costly methods of water transport are phased out.