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There are several payment methods that importers and exporters can use in international trade, each with its own set of risks and benefits. One of the most widely used, yet often misunderstood, methods is the open account.
In this article, you’ll learn everything you need to know about open account transactions, including what they are, why they’re popular and how to use this method safely and successfully.
What is an open account in international trade?
An open account transaction is when a seller ships goods to a buyer before getting paid. Sellers typically request payment by a later, agreed-upon date, which is typically 30, 60 or 90 days after shipment.
Unlike other terms such as payment in advance or letters of credit, there is no obligation for the buyer to pay before receiving the goods. As a result, the buyer gets to inspect the goods before settling the invoice.
Here’s what a typical open account process looks like:
- The buyer and seller negotiate terms, including payment deadline and insurance
- The seller ships goods and provides all necessary export documentation under one of the 11 Incoterms
- The seller issues an invoice with clear payment terms
- The buyer receives and inspects the goods
- The buyer pays within the agreed payment period
Open accounts rely heavily on trust between the buyer and seller. If a dispute occurs, lawsuits or a mediation process will often be the only resolution.
Who uses open accounts in international trade?
Open accounts are one of the most common international payment methods, but their use is particularly common in:
- Established trading relationships. Businesses with longstanding relations often employ open accounts thanks to their flexibility and straightforwardness.
- Major corporations. Large importers with strong bargaining power will often insist on open account terms.
- Competitive markets. Exporters seeking to win and retain customers, particularly in competitive sectors, frequently use open accounts to attract buyers.
Open accounts are naturally more advantageous for the buyer. But, as we’ll see below, they can be beneficial to sellers who want to increase market share.
Why use an open account?
Open accounts deliver significant advantages to buyers, but also to sellers willing to take calculated risks.
The benefits of open accounts to buyers
Open accounts transfer most of the transactional risk and financial burden to the seller, offering several key advantages:
- Superior cash flow management. Open accounts give importers the opportunity to receive and sell goods before payment is due. This significantly enhances liquidity and working capital, allowing businesses to rapidly expand.
- Increase flexibility and simplicity. Open account payments come with significantly less administrative burden than other payments. There’s no need to prepare cash in advance, complete financing or arrange letters of credit.
- Better inventory and working capital management. Open accounts let importers order larger quantities, knowing payment isn’t required immediately. They may be able to get discounted pricing for buying in bulk and can ensure they always have products to fulfil customer orders.
- Reduced costs. Buyers save on transaction fees and administrative expenses with open accounts. This can mean a more competitive cost base when importing goods, particularly for price-sensitive markets.
For importers, an open account is arguably the best international payment term.
The benefits of open accounts for sellers
For exporters, open accounts can carry significant risk — something we’ll explore below. But there are compelling reasons to offer this method. Here’s how sellers stand to benefit from open accounts:
- More competitiveness. Agreeing to open account terms can markedly increase a seller’s competitiveness. Sellers who are able to provide open accounts often secure deals that those insisting on upfront or secured payment may lose.
- Greater expansion opportunities. Open accounts help sellers break down barriers to international trade. This payment method often translates into larger order volumes and more frequent orders. For new market entrants or those seeking to expand their customer base, offering open accounts can be a vital strategy to differentiate themselves from established competitors.
- Stronger customer relationships. Because open accounts are built on trust and mutual benefit, they can foster long-term business relationships. Buyers appreciate the flexibility and support provided, making them more likely to return for future transactions and potentially develop a sense of loyalty.
- Lower transaction costs. Costs associated with open account transactions are comparatively low for sellers, not least because there’s no need for letters of credit or other financial paperwork. This can help exporters improve their margins if the risk is managed through tools like credit insurance.
By accommodating the buying preferences of their international customers, sellers can position themselves strategically for future growth. An open account agreement today may yield a sale, but also future business, referrals or entry into new markets. Being regarded as a flexible and trusted trading partner can open doors far beyond the immediate value of a single transaction.
What are the risks of open accounts?
While open accounts open doors, they also introduce risks — especially to exporters. If you’re a UK exporter, offering open account terms can potentially expose your business to both financial and operational vulnerabilities if it’s not managed correctly and strategically.
Below, we explore the main risks associated with open account trading in detail, so that you can make informed decisions about when and how to use this method in international trade.
1. Risk of non-payment
The biggest risk of an open account arrangement is not receiving payment. Since the exporter has already shipped the goods and provided the agreed credit terms, any failure by the buyer to remit payment can result in severe financial losses for the seller.
This risk becomes particularly concerning when dealing with new or untested customers, or when trading in foreign markets where legal enforcement of payment defaults is cumbersome or impractical. The only way to avoid this risk is to demand cash in advance from high-risk buyers.
2. Delayed payments affecting cash flow
Even when buyers eventually pay, delays can create cash flow problems for exporters. This is particularly problematic for SMEs, who may rely on timely payments to fulfil other orders.
In markets where late payments are common, the risk can accumulate over time, leading to broader financial strain, even if the overall trade relationship appears stable.
3. Exposure to political and economic risks
Open account trade leaves sellers vulnerable to macroeconomic and political risks in the buyer’s country. For example, sudden changes in import regulations or economic sanctions can prevent the buyer from executing payment. Even buyers with excellent credit histories may be unable to fulfil their obligations if their home market is in crisis.
This is particularly important to consider when exporting to developing economies or politically unstable regions, which can be more prone to abrupt financial and regulatory disruptions.
4. Currency exchange risks
For UK exporters trading in foreign currencies, exchange rate fluctuations between the time of invoice issuance and payment receipt can impact profitability. If the pound strengthens against the foreign buyer’s currency during the payment window, the actual amount received after conversion could be significantly lower, eating into or even nullifying your profit margin.
Without using financial instruments such as forward contracts to hedge against currency risk, sellers may find themselves at the mercy of volatile forex markets.
5 ways to use open accounts successfully
Leveraging open accounts can be advantageous to importers and exporters, but you must manage them strategically.
Below is a breakdown of best practices to help you manage open account terms effectively and reduce the risk of loss.
1. Build trusted relationships through due diligence
Before entering into an open account agreement, know exactly who you’re dealing with. Trust is vital, but it must be earned and grounded in evidence.
- Conduct credit checks through commercial credit rating agencies or use trade references from existing suppliers.
- Evaluate the buyer’s financial position, trading history and regulatory compliance.
- Offer open account terms on a trial basis before extending them to larger transactions.
Establishing a solid foundation early on gives you confidence in your buyer’s ability and willingness to pay on time. It also demonstrates that you’re a professional, reliable trade partner.
2. Set clear terms and document everything
Unclear or loosely written agreements leave you exposed. Protect your business by formalising every step of the trade.
- Create comprehensive sales contracts that outline product specifications, pricing, delivery timelines, payment terms, late penalties and liability.
- Ensure invoices and commercial documents match contract terms exactly. Even small errors can result in delays or disputes.
- Use standard Incoterms, like DDP, FOB or CIF, to clarify who’s responsible for shipping, insurance and customs.
Good paperwork is your first line of defence if things go wrong.
3. Communicate regularly and increase transparency
Strong communication throughout the trade process fosters trust, helps pre-empt problems and ensures smoother operations.
- Confirm each stage of the trade process with your buyer, from production timelines to shipping updates.
- Share copies of all commercial documents early to avoid last-minute disputes or customs delays.
- Build rapport over time to create more open, reliable partnerships.
Transparent, timely communication reduces errors, builds goodwill and positions your business as reliable and trustworthy.
4. Define credit limits and monitor payment behaviour
Even the most credible buyers can run into challenges. Good credit risk management policies are essential when offering open account terms.
- Set and enforce internal credit limits for each buyer based on turnover and financial strength.
- Track payment history and look for red flags like late payments and extended silence.
- Reassess credit limits regularly, particularly during inflation, interest rate hikes, or other market shifts.
These policies help prevent credit overexposure and flag problem buyers before cash flow becomes a concern.
5. Review and refine your trading policy over time
Global trade evolves constantly. Buyers grow, markets shift and best practices change. To succeed long-term, your open account policy should be flexible:
- Review buyer creditworthiness and country risk regularly.
- Look for patterns in late payments or delayed shipments and adjust terms accordingly.
- Update contracts annually to reflect changes in trade law, tax, or logistics.
By adopting a proactive stance and embracing continuous improvement, you effectively future-proof your trade strategy against emerging risks.
What other international payment methods are there?
An open account is just one of several payment terms. Here are other commonly used methods, and when you should consider them.
Cash in advance
Cash in advance requires the buyer to pay the seller in full before goods are shipped. This is an extremely safe method for exporters because it eliminates the risk of non-payment. But it means buyers assume all the risk, tying up capital before they receive the products.
Companies use cash in advance when trading with new or high-risk buyers. Payment is typically made through wire transfers, credit cards or online payment gateways.
Letter of credit
A letter of credit is a commitment from the buyer’s bank that payment will be made as long as the seller can prove they’ve shipped the goods and complied with agreed terms.
This is one of the most secure payment methods for buyers and sellers as it leverages the credibility of a financial institution. It can be complex, however, and incur significant bank fees. It’s not ideal for low-value transactions.
Documentary collection
Under documentary collection terms, the seller ships the goods and submits shipping documents — like the bill of lading — to their bank, which forwards them to the buyer’s bank. The buyer can only receive the documents (and therefore collect the goods) once they’ve made payment.
While this method comes with more assurances than open accounts, banks do not guarantee the settlement of the fee. They only facilitate the transaction.
Consignment
Consignment involves delivering goods to the buyer but only receiving payment once the goods have been sold to customers. It’s the riskiest option for sellers and usually reserved for trusted, long-term partners.
No single payment method is best for every transaction. The choice depends on factors like the level of trust between parties, the size of the transaction and your risk tolerance.
Ship anything, anywhere with Pro Carrier Freight
Open accounts are a cornerstone of international trade. By understanding how open accounts work, their risks and how to mitigate them, UK importers and exporters can maximise their opportunities and minimise the potential pitfalls.
At Pro Carrier, we help you navigate the complexities of international trade, finding the right payment terms for your shipment and handling all of the processes. Read our case studies to learn how we help retailers like you import goods or speak to one of our experts today.