Importers and exporters who know and trust each other and are comfortable with the commercial and country risks associated with the transaction can use this to, settle international trade transactions.
An open account is the cheapest and easiest method of settling international transactions
Open accounts favour the buyer
Extended payment terms
It may place a constraint on the seller's cash flow if the buyer wants extended payment terms
It should only be used where the standing of the buyer and the buyer's country are undoubted
This method of payment favours the buyer, as he/she only has to pay for the goods after their arrival at their destination. The seller runs the risk of shipping the goods and never receiving payment. For this reason, open account should only be used when the seller trusts the buyer and is happy with the country risk of the buyer.
What are the risks?
The buyer, due to financial constraints or deliberate default, may not effect payment
The seller loses control over the goods, as all documents of title are sent directly to the buyer
The buyer may be restrained from paying due to circumstances beyond his/her control e.g. exchange control regulations or other laws introduced in the buyer's country
How can the seller reduce their risk?
A bank/status report can be obtained to ascertain the financial standing, reliability and integrity of the buyer. If transactions are ongoing, it is wise for the seller to update reports on a regular basis.
The seller should be confident that the buyer's country would not impose regulations that will prevent the buyer from making payment. A report on the buyer's country could be obtained to assist the seller in this regard.
First National Bank - a division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider 1929/001225/06 (NCRCP20).
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