Often the seller will allow the buyer 30 or 60 days of credit period before they expect to be paid.
This is common practice in domestic sales and it’s now becoming more prevalent in cross border business too.
Open account trading is attractive to buyers as they can receive goods or services on deferred payment terms; they don’t have to pay for them upfront. They can buy without creating a financial risk.
From a buyer’s perspective this is clearly preferable to traditional documentary finance options (like letters of credit) where the buyer has to set up documentation, commit their funds and make upfront payments before they can receive their purchases.
Open account makes it easy for the buyer to do business with the seller. And that gives the seller using open account a real competitive advantage. But on the other hand, the seller now faces the risk that they provide their goods and services and the buyer might default on their payment, whether through insolvency or fraud.
The seller also must fund its operations until it receives the deferred payment; it has to be able to buy further goods, pay wages and meet overhead costs. So open account also creates a finance requirement and potential payment risks for the seller.
To address these specific challenges, sellers are now being securely and safely served by a rapidly growing global finance industry which is meeting the needs of businesses operating in the open account environment.
By the end of 2018, open account receivables finance was estimated to be an industry with around €2.7 trillion of client turnover and one showing 10% CAGR over the last twenty years.
The trading world is voting strongly to adopt open account because the benefits significantly outweigh the risks; for domestic and increasingly for international business, open account is becoming the norm for business to business transactions.