How can it help me?
Open account payment terms can make your export contract attractive to an overseas buyer, as they receive delivery of the goods and services before paying for them.
What is it?
Open account—also called open credit—involves delivery of your goods or services to the buyer with an invoice requesting payment at a certain time after delivery. The time you give the buyer to pay is called the credit term.
How does it work?
In negotiating an export contract, you agree with your buyer the amount, currency, timing and method of payment. When you ship the goods or provide the services, the buyer receives an invoice setting out those payment details. Control of the goods passes to your buyer before you receive payment.
To avoid misunderstanding, the credit term agreed with your buyer is usually also stated on the invoice. For example, if your buyer has 30 days’ credit, the invoice will state when the 30 days begin—on the date of invoice, the date of delivery or another date.
When a payment is due, your buyer will usually send it by:
- telegraphic (wire) transfer through a bank or
- international bank cheque (bank draft).
How risky is it?
A range of payment methods is used in international trade, with payments taking place at a different stage of the export transaction in each. In general, this means that each method has a different level of non-payment risk for you, the exporter, and non-delivery risk for your buyer.
The diagram below illustrates the risk of open account payment terms compared with other payment methods.
What are the pros and cons?
| Pros |
Cons |
| May increase your market competitiveness, as this payment method has no risk for your overseas buyers and it may also help their cash flow |
The relatively high risk of non-payment makes open account suited to long standing, trouble-free trading relationships |
| International telegraphic transfers and bank cheques are cheaper and more straightforward payment methods for you and your buyer than a documentary collection or documentary credit |
As you don’t receive payment until after you’ve shipped the goods, payment on open account terms may strain your cash flow, especially if you provide extended payment terms |
| |
If the export contract is in a foreign currency, you are exposed to exchange rate risk from the date of the sale contract to the time of payment |
What costs are involved?
- Telegraphic transfers—the cost is usually paid by the sender (your buyer).
- International cheques—check with your bank whether collection charges apply.
- Other costs—you may need to factor in the costs of reducing your non-payment risk, such as taking out export credit insurance, or of raising working capital.
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