When it arrives in South America, Equipment Dealer verifies that the shipment includes everything that was ordered. Equipment Dealer's South American Bank releases the money to GYT's USA bank and Green and Yellow Tractor is paid for the equipment. There is one problem in this transaction. Usually, Equipment Dealer does not have the money but will borrow the money from the bank. The situation is created because GYT wants to be sure that it will be paid for the equipment that it ships to South America.
Credit insurance can provide that guarantee of payment.
If Equipment Dealer defaults on making payment, credit insurance would pay Green and Yellow Tractor Company. Because GYT uses the credit insurance, there is no need for a letter of credit. By the use of the commercial paper, GYT will have cash to cover operating expenses. As a result of having the cash it needs, GYT is in a position to offer financing to Equipment Dealer. By using credit insurance GYT is able to be much more competitive in the international market.