What is Open Account?
Open account means exporting on the basis of "ship now, pay later".
Export the goods.
Buyer promises to pay later.
Trust the buyer.
It is called different things in different countries. For example, it is also referred to as exporting on "DA terms" or "sale contract". Buyers can typically ask for 30, 60, 90 or more days credit after shipment before the commercial invoice is due.
Why do exporters agree to "ship now, pay later" terms?
Many years ago, most world trade (over 50%) was supported by bank guarantees, called letter of credit. Two things have happened:
Letter of credit products have become more expensive and complicated - and often no longer really provide effective protection to exporters.
During the last 25 years, Chinese banks have supported Chinese exporters with low cost export finance - allowing them to offer open account, "ship now, pay later" terms to buyers.
So buyers have got used to working on open account and expect their exporters to offer it.
Open account benefits the buyer:
Working open account can be great for buyers:
The goods often can be sold before they have to be paid for.
The buyer gets good cash flow. The more he buys, the more net cash he generates.
It is simple and easy to process. There are no complicated forms, no fees to pay, no banking lines to use up, no need to recruit and keep trade finance specialists in an import or LC department.
And usually the buyer has the power in the relationship. If the buyer demands open account, exporters agree and then worry about how they get paid later.
The answer: get invoices approved at shipment
Without an approved invoice, the exporter has to trust that the buyer will pay later and runs the risk that the buyer delays payment, reduces the amount or may be even does not pay at all.
The exporter also has to find the cash to purchase the materials and pay his workers whilst he is waiting for the buyer to pay later and convince his local bank that the buyer can be trusted.
In many countries, exporters are not allowed to run these risks and governments demand that their banks control the export of goods to make sure that buyers pay cash before shipment.
Buyers that use the PrimaTrade platform have access to an automated 3-way system that gets invoices approved at shipment aginst shipping documents - see more here.
This enables the exporter to manage his risks and get paid at shipment. Open account becomes safe for exporters because the approval can be given before control of the goods is handed over - solving the trust issue. And the invoice approval can lead to cash at shipment coming from:
the importer via an early payment
a supply chain finance program, or
by using the buyer-guaranteed invoice as collateral for financing locally.
These methods are natively supported by the PrimaTrade platform.
How can I find out more?
There are lots of materials available to understand how to work better with open account trades.
Sign up to join the www.prima.trade website and get access to our detailed resources and FAQs.
These resources cover how buyers can safely approve invoices at shipment using our 3-way match AP Automation system, and
How to use approved invoices to get cash to exporters at shipment.