Open Account Transaction Overview
An open account transaction is a trade finance solution used in cross-border trade where the goods are shipped by the exporter and received by the importer before payment is due for the transaction. Payment by the importer for the transaction is then typically due within 90 days. While 90 days is certainly not long-term import financing, it may well be a sufficient amount of time for the importer to receive and resell the shipment without ever having come out of pocket.
Open Account transactions are, in many respects, similar to Consignment Purchases, at least insofar as the importer’s payment for the shipment to the exporter is not due and payable until after the shipment has been received by the importer or, in many cases, payment is not due until after the importer has sold the goods to his customers.
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Financing Imports With Open Account
An open account transaction in cross-border trade is the simplest form of trade finance. In open account transactions, the exporter extends credit terms directly to the importer without the involvement of a third-party trade finance provider. More specifically, in an Open Account transaction the goods are produced and shipped by the exporter and received by the importer before payment for the transaction is made or becomes due. Generally, payment by the importer is payable to the exporter within 90 days.
An Open Account transaction disproportionately favors the importer over the exporter in terms of cash flow and risk mitigation. This is one of the safest import financing methods for importers, who face very little transaction risk because they receive the goods they are purchasing before paying for them.
Because the structure favors the importer, Open Account transactions have a correspondingly greater risk for the exporter, who is essentially bearing all of the payment default risks in the transaction with very few structural or transactional protections against default. Ordinarily, exporters are not willing to extend Open Account credit terms to importers unless it is an importer with whom they have previously done a great deal of business and with whom they are comfortable.
While that is ordinarily the case, at present, there are market factors at work which are altering that paradigm. The global shortage of trade finance is contributing to an intense competition in export markets. This is especially the case is less developed markets. Because many importers cannot arrange import financing sufficient to book purchases, exporters are unable to find enough importers to purchase their goods. Exporters are compelled to offer Open Account terms or even Consignment terms to importers or lose sales to their competitors. Faced with offering credit terms to importers or reducing production, credit terms are winning out.
Foreign importers are perfectly willing to press this advantage and are, for the time being, able to extract Open Account import finance terms from exporters.
Beyond the present imbalance in world markets that are compelling exporters to advance credit terms in order to generate sales, even under ordinary, balanced market conditions, the extension of credit by exporters to importers is more common abroad than it is in the United States.
Because it is presently a fiercely competitive export market, exporters who are unwilling to provide trade financing by extending Open Account credit terms to importers are likely to lose sales to other exporters who are willing to extend Open Account or even Consignment Purchases import financing terms.
While exporters certainly remain more competitive by extending Open Account credit terms to importers, they must do so with full awareness that the financial risks in the transaction have shifted in favor of importers. As a result, exporters should examine the political, economic, and commercial risks involved in the transaction in order to assure themselves that they will be paid in full and on-time for the transaction.
It is also possible to mitigate the payment default risk which is associated with Open Account terms by using trade finance techniques such as export credit insurance and invoice factoring to mitigate risk. Exporters may also strengthen their financial position and free up liquidity with pre-export working capital financing or some other form of export financing so they will have the capital they need to produce and ship the goods while waiting for payment under the Open Account credit terms.
Open Account Financing Key Takeaways
- Open Account import financing terms may be offered in highly competitive export markets by exporters who are competing for the sale. The importer and the exporter may well benefit in the intermediate and long-term from having created a new trading partnership.
- Both the goods and the transaction documents are shipped straight to the importer who has contractually agreed to make date certain, amount certain payments to the exporter, usually within 90 days.
- As a method of import financing, Open Account transactions offer tremendous advantageous terms to importers, but they do so at the expense of the exporter who must then bear significant risk exposure. The exporter must also bear the additional costs associated with risk mitigation tools the exporter must employ.
- Exporters who do extend Open Account terms frequently add other trade finance facilities to the equation from the export side of the transaction, most notably export working capital financing, government-guaranteed export finance programs, export credit insurance, and export factoring.
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