The term “Open Account” refers to a credit arrangement between the buyer and seller of goods or services in which the goods are shipped (or services rendered) prior to payment. The buyer of the goods is granted a period of time after shipment (or service rendered) in which to pay the outstanding balance on their account. This arrangement is very common in certain countries for domestic trade, but is less commonly used in international trade, and would only be used for long-standing and prompt paying repeat customers with impeccable credit. Sellers employing the open account payment method should know their buyer and be comfortable with economic and political conditions in the buyer’s country. Depending upon the currency being used, the seller may also be exposed to fluctuations in exchange rates.
An example. If a seller grants a buyer terms of “net 30 days after shipment” then this means that the buyer must pay the outstanding balance within 30 days after the goods have shipped. This arrangement would be a form of “open account” because the buyer is not paying for such goods until after they have shipped.
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When an Open Account arrangement is used, all of the credit risk is borne by the seller of the goods because they make the shipment prior to receipt of payment. This credit arrangement may also require the seller to invest large sums into working capital due to the cash-flow delays inherent with deferred payments on open accounts. Sellers must bear the costs of purchase or manufacture of goods or services for the longest period of all of the common forms of payment method.
