Open Account
In an open account transaction, the seller ships (or delivers) goods and sends the shipping documents including invoice directly (not using a banking system) to the buyer without receiving payment, and the buyer will pay at a future due date. The seller e
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Open Account
6.1 Introduction In an open account transaction, the seller ships (or delivers) goods and sends the shipping documents including invoice directly (not using a banking system) to the buyer without receiving payment, and the buyer will pay at a future due date. The seller extends credit to the buyer by allowing them to pay in arrears. An open account transaction allows a foreign buyer to make payments at some future date, and the buyer does not issue any negotiable instrument evidencing his legal commitment to pay at the appointed time. These terms are most common when the buyer has a strong credit history and is well-known to the seller. An “open account” is conceptually the opposite of a “payment in advance”. In an open account transaction, the seller delivers goods without any guarantee or security for payment—such as bills of exchange, documentary credits, or payment guarantees—and therefore, they are relying on the buyer’s payment at a future due date. Once the seller ships goods and sends bills of lading to the buyer, they cannot get the goods back. The seller loses all control of the goods and relies on the buyer to pay at due date. The only recourse in case of non-payment is taking legal action against the buyer, which is a time-consuming and expensive process. An open account is well used when the buyer has a long and favorable payment record or is creditworthy.1 The most practical method to mitigate the risks associated with an open account would be conducting a thorough credit investigation and credit evaluation of the buyer, and purchasing export credit insurance from an export credit agency (ECA) in an exporting country. Although an open account is very risky to the seller, it is the most common payment method in international trade as the international trade market is very competitive and tends to be a buyer’s market. Many buyers often press sellers for open account 1 US
Commercial Services (2015), p. 162.
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2021 S. M. Kim, Payment Methods and Finance for International Trade, https://doi.org/10.1007/978-981-15-7039-1_6
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6 Open Account
payment terms. Therefore, sellers who do not offer open account terms will lose out to their competitors and will not take a lot of market share. An open account transaction is very simple, easy to use, and inexpensive. An open account can be a convenient payment method if the buyer has a good payment record and is reliable. The expressions that indicate the existence of an open account in a sale contract are “T/T 60 Days from B/L date”, “O/A (or T/T) 90 Days from B/L date”, “Wire Transfer 60 Days from B/L date” etc.
6.2 Operation of an Open Account In an open account transaction (see Fig. 6.1), the seller ships goods according to a contract for sale and sends shipping documents directly to the buyer, and the buyer will pay in the future. The seller delivers goods to the buyer without receiving payment or any other legally binding securi
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