Open-Account Trade
Open-account trade allows the buyer to receive goods or services before payment becomes due. It supports the buyer’s working capital but leaves the supplier exposed to the buyer’s credit and payment risk.
Also called: open account
Under open-account terms the supplier ships first and invoices the buyer for payment at an agreed later date, commonly 30, 60 or 90 days after shipment or invoice. No bank stands between the parties: the buyer simply pays by transfer when the invoice falls due. It is the cheapest structure to run, because there are no letter-of-credit fees or document checks, and it gives the buyer time to receive, inspect and sometimes resell the goods before money leaves.
Because the supplier carries the whole credit risk, open account usually follows a track record. A Chinese manufacturer is unlikely to offer it to a new overseas buyer and is more likely to require cash in advance or a deposit until volumes and payment history justify better terms. Suppliers that do extend open account may protect themselves with export credit insurance, receivables finance or factoring, which shifts part of the risk to a financier.
For the buyer, open account changes the payment problem rather than removing it. Each invoice still needs a clean, documented transfer to the correct beneficiary, in the currency the supplier's account can receive, by the due date. Late or short payment damages the relationship quickly, and a disputed delivery has to be resolved under the contract because no bank is holding documents or funds. Supplier-payment terms should state the due date, currency and charges clearly.
In practice
Open account is the most favorable structure for the buyer and the riskiest for the supplier. A buyer that has only ever paid in advance should not expect a new Chinese supplier to switch to open account without a payment history or credit support.
Example
Hypothetically, an apparel brand that has paid its Guangdong supplier punctually for two years negotiates 60-day open-account terms. A US$120,000 shipment leaves port on 1 March, the invoice is dated the same day, and the brand pays by wire on 30 April. The brand gains two months of working capital; the supplier insures the receivable to cover the risk of nonpayment.
Commonly confused with
| Term | How it differs |
|---|---|
| Cash in advance | Cash in advance puts the risk on the buyer, who pays before shipment. Open account reverses it: the supplier ships first and trusts the buyer to pay later. |
See also
- Cash in AdvanceCash in advance requires the buyer to pay before the seller ships or releases the goods. It protects the supplier against nonpayment but gives the buyer less protection if the goods are late, defective or never delivered.
- Documentary CollectionA documentary collection is a trade-payment method in which banks handle shipping or commercial documents in exchange for payment or acceptance. The banks facilitate the process but do not provide the same payment guarantee as an issuing bank under a letter of credit.
- Letter of CreditA letter of credit is a bank’s conditional undertaking to pay when the seller presents documents that comply with its stated terms. Banks examine documents rather than confirming the physical quality or performance of the goods.
- Supplier-Payment TermsSupplier-payment terms define when and under what conditions a buyer must pay a supplier. They may include deposits, production milestones, inspection requirements, shipment events, credit periods and final-balance deadlines.