Open AccountOpen Account
In a foreign transaction, an open account can be a convenient method of payment if the buyer is well established, has a long and favorable payment record, or has been thoroughly checked for creditworthiness. With an open account, the exporter simply bills the customer, who is expected to pay under agreed terms at a future date. Obviously, this option is advantageous to the importer in terms of cash flow and cost, but it is consequently a risky choice for an exporter. Because of intense competition in 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 lose a sale to their competitors.
However, there are risks associated with open-account sales. The absence of documents and banking channels, for example, might make it difficult to pursue the legal enforcement of claims. The exporter might also have to pursue collection abroad, which can be difficult and costly. Another problem is that receivables may be harder to finance because of the unavailability of drafts or other evidence of indebtedness. It is possible to substantially mitigate the risk of nonpayment associated with open-account trade by using trade finance techniques such as export credit insurance and factoring. Exporters may also seek export working capital financing to ensure that they have access to financing for production and for credit while waiting for payment.
Exporters contemplating a sale on open-account terms should thoroughly examine the political, economic, and commercial risks entailed. Exporters who will need financing for the transaction before the issuance of a pro forma invoice to a buyer should consult with their bankers.
| An open account may be a good way to build trust with a regular and reliable customer. |
However, there are risks associated with open-account sales. The absence of documents and banking channels, for example, might make it difficult to pursue the legal enforcement of claims. The exporter might also have to pursue collection abroad, which can be difficult and costly. Another problem is that receivables may be harder to finance because of the unavailability of drafts or other evidence of indebtedness. It is possible to substantially mitigate the risk of nonpayment associated with open-account trade by using trade finance techniques such as export credit insurance and factoring. Exporters may also seek export working capital financing to ensure that they have access to financing for production and for credit while waiting for payment.
Exporters contemplating a sale on open-account terms should thoroughly examine the political, economic, and commercial risks entailed. Exporters who will need financing for the transaction before the issuance of a pro forma invoice to a buyer should consult with their bankers.