20.2 Open Account and Advance Payment

For exporters, any sale is a gift until they receive payment; for importers, any payment is a donation until they receive goods (Noah, 2024). Successful traders consider this when deciding the payment terms and payment methods in trade.

The open account method gives importers the liberty to pay once the goods have been delivered to them. No doubt, it is the safest method for an importer/buyer in terms of cash flow and cost; it is the highest-risk option for an exporter (International Trade Administration, n.d.a). Throughout the transaction, exporters will be exposed to non-payment risk as they have delivered goods and documents with an expectation of receiving payment in future, which could be 30 days, 60 days or 90 days in trade transactions. As the open account method of payment poses a high risk to the exporter, an exporter agrees to it only if they can trust the importer.

David Noah (2024) explains that open account terms can help businesses win customers in competitive markets. He further explains that open account terms can help mitigate the risk of non-payment when used alongside other trade finance techniques:

• export working capital financing
• government-guaranteed export working capital program
• export credit insurance
• export factoring
• standby letters of credit (Noah, 2024).

Open accounts may also be offered to importers who demand to pay in their local currency using a proper foreign exchange risk hedging technique such as forwarding contracts (Noah, 2024).

Advance payment is opposite to open account. In advance payment, exporters receive most of the payment from a transaction before sending goods and documents. This way, they can support the manufacturing without taking additional credit from banks or financial institutions, but it leaves importers at high non-performance risk. This makes advance payment the most secure method of payment for exporters but a high-risk option for importers (Noah, 2024). As an importer has already paid, they will lose their business if exporters do not deliver goods as promised in the contract. Thus, importers/buyers only agree to this method of payment if they know and can trust the exporter.

According to Noah (2019, July), there are several factors to consider when deciding to use the cash-in-advance option:

• • When the importer
    • is a new customer.
    • has a short operating history.
    • has unclear creditworthiness.
    • is from a country with high political and commercial risks.

• • When the exporter
    • has a unique product.
    • has a rare product.
    • has a high-demand product.
    • uses credit card transactions for online business.

References

International Trade Administration. (n.d.a). Methods of payment. https://www.trade.gov/methods-payment

Noah, D. (2019, July 22). Methods of payment in international trade: Cash in advance. Shipping Solutions. https://www.shippingsolutions.com/blog/methods-of-payment-in-international-trade-cash-in-advance

Noah, D. (2024, Feb. 21). Methods of payment in international trade: Open account. Shipping Solutions. https://www.shippingsolutions.com/blog/methods-of-payment-in-international-trade-open-account

Tutorials Point. (n.d.). International Trade Finance. https://www.tutorialspoint.com/international_finance/international_trade_finance.htm