What Is Open Account in Trade?
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- Open account is a trade payment term under which the seller ships and delivers the goods before payment is due, and the buyer pays the invoice later. In international sales, payment is typically due in 30, 60 or 90 days. It favors the buyer's cash flow and leaves the seller with the risk of non-payment.
Also called: Open account terms
How it works
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. That is how the U.S. International Trade Administration defines it in its guide to methods of payment.
In its Trade Finance Guide, the agency describes the mechanics: the goods, along with all the necessary documents, are shipped directly to the importer, who has agreed to pay the exporter's invoice at a specified date. Selling on open account means the seller extends credit to the buyer.
The agency weighs the two sides this way:
- For the buyer: it is one of the most advantageous options in terms of cash flow and cost.
- For the seller: it is one of the highest risk options, because the buyer could default on the payment obligation after the goods ship.
- Competition: foreign buyers often press exporters for open account terms, so exporters who are reluctant to extend credit may lose a sale to their competitors.
The guide recommends open account (a) in low-risk trading relationships or markets and (b) in competitive markets to win customers, with the use of one or more appropriate trade finance techniques.
Managing open account risk
The Trade Finance Guide lists four trade finance techniques an exporter can use to offer open account terms in competitive markets:
- Export working capital financing, which covers the cash cycle from the purchase of raw materials through the collection of the sales proceeds.
- Government-guaranteed export working capital programs, offered by the U.S. Small Business Administration and the U.S. Export-Import Bank.
- Export credit insurance, which protects against commercial losses such as default, insolvency and bankruptcy, and political losses such as war, nationalization and currency inconvertibility.
- Export factoring, the discounting of short-term receivables of up to 180 days, in which the factor assumes the financial liability of the importer to pay and handles collections.
Among the cons of open account, the guide lists additional costs associated with risk mitigation measures. This is general information, not financial or legal advice.
Open account vs. cash in advance and letters of credit
The International Trade Administration places open account at the buyer-friendly end of its payment methods:
- Cash in advance: the exporter is paid before ownership of the goods is transferred, so it avoids credit risk, but it is the least attractive option for the buyer.
- Letter of credit: a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in it have been met.
- Open account: the goods ship and are delivered first, and the buyer pays later.
Example
A manufacturer sells $18,000 of parts to a long-standing distributor on open account, payable 30 days after the invoice date. The goods ship on June 1 with the invoice, and the distributor receives them on June 4.
- June 1 to July 1: the manufacturer has an open receivable of $18,000.
- July 1: the distributor pays the $18,000 invoice.
If the manufacturer insured the receivable or factored the invoice, that cover would be one of the additional costs associated with risk mitigation measures that the Trade Finance Guide lists among the cons of open account.
On Shopify
Shopify B2B is on the Basic, Grow, Advanced and Shopify Plus plans, and payment terms define how long a company has to pay for an order. You can set payment terms for each company location. For net terms, the available terms are net 7, net 15, net 30, net 45, net 60, and net 90, and all terms start from the day the order is placed.
Until the due date, B2B customers can log in to customer accounts, select an order, and pay for it by clicking Pay now. After the terms expire, customers can still make payments but the order displays as Overdue in customer accounts. Payments aren't automatically captured when the payment terms expire.
How Uncap helps
Uncap's guide to Shopify net terms notes that credit checks, credit limits, dunning and AR aging stay a back-office decision, usually run in the ERP and synced to which companies get terms. Uncap's B2B payments guide adds that the order flows to the ERP via Uncap Connect with the net terms, due date, and PO number as part of the order payload.
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Frequently asked questions
What is an open account in trade?
An open account in trade is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. The buyer pays the seller's invoice on the agreed date, so the seller carries the risk of non-payment until then.
How can an exporter reduce open account risk?
An exporter can reduce open account risk with trade finance techniques. The U.S. International Trade Administration's Trade Finance Guide names export working capital financing, government-guaranteed export working capital programs, export credit insurance, and export factoring, and says the risk of non-payment can be substantially mitigated with export credit insurance and factoring.
What is the difference between open account and a letter of credit?
On open account, the seller ships and delivers first and the buyer pays the invoice later, which favors the buyer. With a letter of credit, a bank commits on the buyer's behalf that the exporter will be paid, provided the terms and conditions stated in the letter of credit have been met.
