Methods of Payment in International Trade - Open Account

Open Account



An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Because of the intense competition for export markets, foreign buyers often press exporters for open account terms. In addition, the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, while this method of payment will definitely enhance export competitiveness, exporters should thoroughly examine the political, economic, and commercial risks, as well as cultural influences to ensure that payment will be received in full and on time. It is possible to substantially mitigate the risk of nonpayment associated with open account trade by using such trade finance techniques as export credit insurance and factoring. Exporters may also wish to seek export working capital financing to ensure that they have access to financing for both the production for export and for any credit while waiting
to be paid.

Key Points
• The goods, along with all the necessary documents, are shipped directly to the importer who agrees to pay the exporter’s invoice at a future date, usually in 30 to 90 days.
• Exporter should be absolutely confident that the importer will accept shipment and pay at agreed time and that the importing country is commercially and politically secure.
• Open account terms may help win customers in competitive markets, if used with one or more of the appropriate trade finance techniques that mitigate the risk of nonpayment.

How to Offer Open Account Terms in Competitive Markets


Open account terms may be offered in competitive markets with the use of one or more of the following trade finance techniques:
(1) Export Working Capital Financing,
(2) Government-Guaranteed Export Working Capital Programs,
(3) Export Credit Insurance,
(4) Export Factoring, and
(5) Forfaiting.


Characteristics of an Open Account

Applicability
Recommended for use (1) in secure trading relationships or markets or (2) in competitive markets to win customers with the use of one or more appropriate trade finance techniques.
Risk
Exporter faces significant risk as the buyer could default on payment obligation after shipment of the goods.
Pros
• Boost competitiveness in the global market
• Establish and maintain a successful trade relationship
Cons
• Exposed significantly to the risk of nonpayment
• Additional costs associated with risk mitigation measures