Open account
An open account transaction is a sale where the goods are shipped and delivered before payment is due. Which means that the only formal evidence of credit is an invoice which accompanies the shipment and which the buyer signs to indicate that goods have been received. Then, the buyer and the seller each record the purchases on their books of account. An open account transaction in global trade is a sale where the goods are shipped and delivered before payment is due, which is typically in 30, 60 or 90 days. However, this payment term is prudent only when a buyer has absolute confidence that the seller will not wrongfully draw on the reserved letter of credit.
Obviously, this opportunity is the most advantageous for the importer in terms of cash flow and cost, but it is, therefore, the maximum risk option for an exporter. Because of a strong struggle in export markets, foreign buyers often push exporters for open account terms, since the extension of credit by the seller to the buyer is more ordinary abroad.
Pros
- Boost competitiveness in the global market,
- Help establish and maintain a successful trade relationship.
Cons
- Significant exposure to the risk of non-payment,
- Additional costs associated with risk mitigation measures.
