Open account, also known as Cash Against Goods, is a payment method that enables the importer to pay for the goods after they are cleared at the customs of the importing country or on a fixed date after delivery, typically in 30 to 60 days.
While it is a risky payment option for exporters, importers are so keen on working open account as they will not pay for anything until the goods arrive at the importer’s place, checked and confirmed. That said, the fierce competition forces exporters to offer flexible payment options like open account which importers are well aware of.
What are the risks of Open Account for exporters?
- The importer may never pay for the goods if there is no binding clause in the contract
- The goods may not be withdrawn from customs
- The importer may claim that the goods are damaged and doesn’t pay the full amount
- The importer may make a late payment with no excuse
How to mitigate the risks
In order to stand competition exporters, having to accept open account, are exposed to a high risk of non-payment and the like. But fortunately there are financial tools that cater for minimizing or even eliminating the risk of non-payment. With such tools as export credit insurance and factoring, exporters both secure their credits and don’t lose their leads to competitors; so they can build long-term partnerships.
When to use Open Account
Open Account trading should only be considered under the following circumstances:
- There is an established relationship between the parties
- The exporter wants to establish a long-term partnership with the importer
- There is a binding sales agreement
- The exporter has obtained a credit insurance to cover the potential losses
- The importer is a reputable and trustworthy company with a high credit score
- The goods are of small value
Obviously open account puts all the risk on the exporter. However, if the exporter knows how to protect itself from the credit risks, then it will be quite easy to close the deal and turn the prospect into a customer. As a takeaway, I strongly recommend especially the small businesses to study financial risk management deeply and not hesitate to get help from interested agencies.