Open-Account Trade

Open-account trade is an arrangement in which a seller ships goods, or delivers services, together with the shipping and commercial documents, and the buyer pays later on agreed terms, commonly 30, 60 or 90 days after the invoice or delivery date. No bank guarantees payment. The seller extends credit to the buyer and relies on the buyer's willingness and ability to pay when the invoice falls due.

Open account is the most favorable method for the buyer, which receives and can often resell the goods before paying, and the riskiest for the seller. It is widely used between parties that know and trust each other, within corporate groups, and in markets with reliable legal systems. Trade bodies commonly estimate that open account accounts for the large majority of world trade by value, often cited at about 80 percent.

Methods of payment in international trade are usually presented as a spectrum of risk between the exporter and the importer:

1. Cash in advance: the buyer pays before shipment; the buyer carries the risk.
2. Letter of credit: a bank undertakes to pay against compliant documents; risk is shared and largely transferred to banks.
3. Documentary collection: banks exchange documents, such as the bill of lading, for payment or acceptance, but do not guarantee payment.
4. Open account: goods and documents go directly to the buyer, who pays later.
5. Consignment: the seller is paid only after the buyer resells the goods.

Open account is cheaper and simpler than bank-intermediated methods because it avoids letter-of-credit fees and document checks, which is one reason its share of trade grew as supply chains became longer and more integrated.

The parties agree terms in a sales contract or purchase order, often starting from a pro forma invoice and setting out the delivery terms under Incoterms and the credit period. The seller ships the goods and sends a commercial invoice and transport documents directly to the buyer. On or before the due date, the buyer pays, usually by bank transfer. The agreed supplier payment terms can include discounts for early payment, such as 2 percent off if paid within 10 days.

For the seller, the main risks are non-payment, late payment and disputes over the goods, which can lead to short-paid payments when the buyer deducts amounts it claims are owed. In cross-border trade there are also country risks: the buyer's government may impose capital controls or foreign exchange shortages that block payment even when the buyer wants to pay. Pursuing a defaulting foreign buyer through the courts is costly and slow. The seller also finances the transaction for the whole credit period, tying up working capital.

For banks processing the payments, open-account flows carry less documentary evidence than letters of credit, which makes it harder to detect trade-based money laundering. Banks therefore apply trade-payment compliance checks, such as reviewing invoices against payment amounts and counterparties.

• Credit assessment. Checking the buyer's financial standing, payment history and country before agreeing terms.
• Trade credit insurance. Insurers or export credit agencies cover a portion of losses if the buyer fails to pay for commercial or political reasons.
• Receivables financing. Factoring, invoice discounting and forfaiting let the seller sell or borrow against its receivables, receiving cash before the due date.
• Supply chain finance. In buyer-led programs, sometimes called reverse factoring, a bank pays the supplier early at a discount based on the buyer's approval of the invoice and the buyer's own credit standing.
• Currency management. Sellers invoicing in a foreign currency use forwards or a natural hedge to protect the value of receivables.

Some countries require exporters to bring sale proceeds home within a set period, under export proceeds repatriation rules, which can limit the credit periods exporters may grant. Others restrict advance payments by importers or require documentation before banks release foreign currency for imports. Where these rules apply, open-account terms must be set with local foreign exchange law in mind, and the broader subject of trade finance covers the bank products used to support such transactions.