Open Account

This method of trade settlement is exactly opposite to Advance payment, and is generally used when the buyers dictate the market dynamics or when the buyers are larger corporates, and sellers are SME’s.

The sellers are required to ship the goods prior to receipt of any payment, or in some cases might receive a percentage of the payment.

There is also a market practise, wherein, post the shipment, the sellers send an electronic (fax or email) copy of the Bill of Lading, Airway Bill etc., to the buyer and against which the buyer initiates a payment. However, this only happens when there are regular transactions between the buyer and the seller, and there is a certain degree of trust that the buyer has on the seller.

Risks for Buyers

1. No percieved risk for the buyer if the seller ships the goods, as per the contractual terms. However, we cannot deny a certain element of opportunity loss that the buyer may have, if the goods are not as per the specifications. This loss can be higher if the buyer is a trader and doing a back to back deal, as the buyer may not be able to fulfil the obligation on their sell side of the trade.

Risks for Sellers

1. Higher risk for the sellers as the shipment of the goods would happen prior to any payment. The seller, would lose physical control of the goods, though the constructive control remains, however, getting the goods re-routed back to the port of loading or to another destination will cost time and money. In some cases sellers may not even find alternate buyers.
2. Payment delays / partial payments, is another risk that the sellers need to perceive, when opting for this trade settlement, as the complete onus and control of the payment obligation entirely lies on the buyer.