Open Account

Open account is a payment arrangement in international trade where the seller ships goods to the buyer and invoices for payment at a later date, typically 30, 60, or 90 days after shipment or delivery. Under open account terms, the buyer receives the goods, clears customs, and takes possession before making payment. This arrangement offers maximum convenience and cash flow advantage to the buyer but places the greatest risk on the seller, who must trust that the buyer will pay after receiving the merchandise.

How Open Account Works

The transaction sequence is straightforward. The seller and buyer agree on open account terms, specifying the payment period (net 30, net 60, etc.) and currency. The seller manufactures and ships the goods, providing the buyer with a commercial invoice, packing list, and shipping documents. The buyer receives the goods and, at the end of the agreed payment period, remits payment by wire transfer or other agreed method.

There is no bank intermediary guaranteeing payment, no letter of credit, and no escrow mechanism. The commercial invoice is the primary payment document, and the seller’s only formal leverage is the contractual obligation created by the purchase order or sales contract.

Risk Profile

Open account is the highest-risk payment method for sellers and the lowest-risk method for buyers. The seller faces several specific risks:

Non-payment. The buyer may refuse to pay after receiving goods, citing quality issues, market changes, or financial difficulties. Collecting on unpaid invoices across international borders is expensive and time-consuming, often requiring foreign legal counsel and enforcement through the buyer’s local courts.

Delayed payment. Even cooperative buyers may pay late, stretching net 30 terms to 60 or 90 days. For sellers with tight cash flow, these delays create working capital problems.

Currency risk. If payment is denominated in the buyer’s currency, exchange rate fluctuations during the payment period can reduce the seller’s realized revenue.

Political risk. Government actions in the buyer’s country (capital controls, sanctions, currency restrictions) can prevent or delay payment even when the buyer is willing to pay.

Why Open Account Is Common

Despite the risks, open account terms are used in roughly 80% of global trade transactions. The reasons are competitive and practical. Buyers prefer open account because it preserves their cash flow and avoids the fees associated with letters of credit (which can cost 1% to 3% of the transaction value). Sellers offer open account to win business in competitive markets where buyers have multiple sourcing options.

In the Amazon FBA supply chain, open account terms are uncommon for first orders from Chinese manufacturers. Most initial orders are paid by wire transfer (T/T), typically 30% deposit before production and 70% balance before shipment. However, as the relationship matures and order volumes grow, some suppliers agree to open account terms for established buyers. A seller placing $200,000 in annual orders with a factory may negotiate net 30 terms after 12 months of consistent purchasing and timely payments.

Mitigating Open Account Risk

Trade credit insurance. Companies like Euler Hermes, Coface, and Atradius offer policies that insure sellers against buyer non-payment. Coverage typically reimburses 85% to 95% of the invoice value if the buyer defaults. Premiums range from 0.1% to 0.5% of insured sales, depending on the buyer’s creditworthiness and country risk.

Export factoring. The seller sells its receivables to a factoring company at a discount (typically 1% to 5% of the invoice value). The factor assumes the collection risk and advances cash to the seller immediately. This converts open account terms into near-immediate payment for the seller.

Credit checks. Before extending open account terms, sellers should obtain credit reports on the buyer from agencies like Dun and Bradstreet or local credit bureaus in the buyer’s country. Setting credit limits based on verified financial data reduces exposure.

Sellers should also structure payment terms to minimize exposure. Starting with net 30, requiring references, and gradually extending terms as the relationship proves reliable is more prudent than offering net 90 on the first transaction.