An open account transaction is a sale where the goods are shipped and delivered before payment is due. 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, since 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, the exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using of one or more of the appropriate trade finance techniques, such as export credit insurance.
The goods, together with all the necessary documents, are shipped directly to the importer who has agreed to pay the exporter's invoice at a specified date. 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. Open account terms may help win customers in competitive markets and can be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment.
As global economies become more integrated, it is easier for exporters and importers themselves to access dependable information about foreign-trade partners, and they are less willing to pay for the risk protection afforded by traditional methods. This has led to a preference for open accounts, and banks can provide value through supply chain finance (SCF), taking care of invoices and funding suppliers (and buyers) against invoices. There is a huge potential market in open account transactions, and banks can take advantage of these volumes by promoting their foreign exchange and SCF services more consistently.
Open account terms may be offered in competitive markets with the use of one or more of the following trade finance techniques:
- Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.
- Bank payment obligation (BPO) is an irrevocable (under certain conditions) obligation of an obligor bank to pay a specified amount to a recipient bank as soon as a matching occurs between data extracted from different trade documents such as invoices, purchase orders, transport documents and certificates.
Useful reading includes the Trade Finance Guide of the US Department of Commerce