Methods of Payment/Open Account
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Unit 4.1-Methods of Payment |
Introduction | Cash in Advance | Documentary Collections | Letters of Credit | Open Account | Combining Methods | Summary | Resources | Activities | Assessment |
Open Account
editOpen account occurs when a seller ships the goods and all the necessary shipping and commercial documents directly to a buyer who agrees to pay a seller’s invoice at a future date. Open account is typically used between established and trusted traders.
| Time of Payment | •As agreed between a buyer and seller, net 30,60, 90 day terms, etc., from date of invoice or bill of lading date. |
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| Goods Available to Buyer | •Before payment (depending on how the products are shipped and the length of payment option). |
| Risks to Seller | •Buyer defaults on payment obligation. •Delays in availability of foreign exchange and transferring of funds from buyer’s country occur. •Payment is blocked due to political events in buyer’s country. |
| Risks to Buyer | •Seller does not ship per the order (product, quantity, quality, and/or shipping method). •Seller does not ship when requested, either early or late. |
| When Appropriate to Quote or Use | •Seller has absolute trust that buyer will accept shipment and pay at agreed time. •Seller is confident that importing country will not impose regulations deferring or blocking transfer of payment. •Seller has sufficient liquidity or access to outside financing to extend deferred payment terms. •Used more regularly in international transactions to avoid high banking fees. |
| Financing | •Seller finances buyer through deferred payment terms. •Seller may be able to obtain bank financing through pledge of receivables. •Selling receivables on a non-recourse basis to a bank. •Leverage and/or financing from domestic/global business. |