In open account transaction a seller (exporter) ships the goods and forward all necessary shipping and commercial documents directly to a buyer (importer) who to pay the exporter’s invoice at a specified date. Open account is typically used between established and trusted traders.
Obviously, this option is the most advantageous for the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors.
However, the exporter should be absolutely confident that the importer will accept shipment and pay at the agreed time and that the importing country is commercially and politically secure.
Some important points for Open Account
- Seller has absolute trust that buyer will accept shipment and pay at agreed time.
- Seller is confident that importing country will not impose regulations deferring or blocking transfer of payment.
- Seller has sufficient liquidity or access to outside financing to extend deferred payment terms.
- Used more regularly in international transactions to avoid high banking fees.
Risks of open account payment for exporters and importers:
Companies do export and import business in order to make money. But just like any other businesses, open account method of international trade has also some risks.
Risks of open account payment for exporters:
An exporter has to bear significant amount of risks when trying to export via open account payment method;
- Non-Payment Risk: Non-payment risk is the biggest and ultimate risk that every exporter should bear when working with an open account term.
- This situation occurs when the importer does not pay the exporter, within the agreed period, even after import custom procedures have been completed and the goods have been delivered to the importer safely.
- Goods Are Not Accepted by the Importer: Importer may elect not to initiate import operations at all. In this scenario, exporters will not be getting paid by the importers. Additionally, exporters may have to pay demurrage and detention charges, as well as freight cost in order to bring back goods to the exporting country.
- Short-Payment Risk: Importers may choose to compensate their losses from the exporters under open account payment terms even without given any advance notice to the exporters.
- Late Payment Risk: Late payment risk is another risk that exporters have to assume in open account payment terms.
- Blocked Payment Risk: Payment is blocked due to political events in buyer’s country.
Risks of open account payment for importers:
Open account payment is the less risky payment option for importers. However, followings are the possible risks of an open account payment term for the importers.
- Non-Delivery Risk: Non-delivery risk can only be realized if importer pays the order amount after the shipment but before the delivery of the goods. Importer would be exposed to a non-delivery risk if the determined payment term is shorter than the expected transit time plus import procedures.
- In order to eliminate non-delivery risk importers make sure that the deferred payment period is longer than the transit time between exporter’s location to importer’s location for a chosen mode of transport.
- Short Delivery Risk: Importer would be exposed to a short delivery risk if the determined payment term is shorter than the expected transit time plus import procedures.
- Low Quality of Goods Delivery Risk: Importer would be exposed to a low quality of goods delivery risk if the exporter does not ship goods as per the order (product, quantity, quality, and/or shipping method).
- Shipment not made on Time: The risk occurs when the exporter does not ship when requested, either early or late.