advantages and disadvantages of open account
MD
Open account is
one of the method of payment that is only used for the most trusted customers, brings both
advantages and disadvantages.
Advantages
Open account trading offers several advantages – particularly that it is simple to administer and involves minimal banking fees or other costs.
The system is attractive to buyers
because it affords them the opportunity to examine the goods before they have to make payment,
thus avoiding risks such as non-delivery, late delivery, failure to receive goods or faulty goods.
the exporter can offer competitive open account terms while substantially mitigating risk of non- payment by using one or more appropriate trade finance techniques
These techniques include export working capital financing, government-guaranteed
export working capital program, export credit insurance
Furthermore, open account trading does not rely on documentation
As a result, it remains a relatively cheap way for
both parties to transact.
Disadvantages
However, open account is not a popular method of payment and can only be used for transactions between exporters and importers who have already established a trust-worthy and long-term business relationship.
This is because while open account is the most secure payment method for importers,
Thereby, the exporter might incur extra costs for debt collection or even litigation and arbitration, which is more difficult with the absence of documents and banking channels.
it places the risks of non payment on exporters who obtain no security for payment,
and have to rely entirely on the creditworthiness and good faith of the buyer.
KL
In conclusion, open account is advantageous to the importer in terms of cash flow and
cost, but it is a risky option for an exporter.
Though open account terms will definitely enhance
export competitiveness, exporters should thoroughly examine the political, economic and
commercial risks as well as cultural influences to ensure that payment will be received in full and on time.