Why We Offer Open Account
Terms to Foreign Buyers
By Michael C. Dennis, MBA, CBF

Reasons to offer open credit to international buyers

Experienced credit managers recognize that there is often significant risk associated with offering open account terms to foreign buyers. For many years, U.S. based companies routinely required foreign buyers to pay for merchandise in advance or supply a letter of credit covering the sale.

Today, economic conditions have changed and most U.S. companies do not enjoy the kind of market power that would enable them to dictate terms of sale to foreign customers. Some of the reasons companies offer open account terms to new or existing foreign customers include:

• The need to meet competition. If other suppliers offer similar products on terms other than letter of credit or cash in advance U.S. exporters are in a very poor competitive position if they are unable or unwilling to match the terms being offered by their competition.

• Offering open account terms sometimes allows the seller to increase the purchase price --- in a sense offsetting [to some degree] the additional risk associated with open account terms with a higher profit margin.

• In cases where the U.S. supplier insists on receiving a letter of credit, buyers are insisting that the seller pay or at least share the cost of obtaining the letter of credit. These costs can be avoided if the seller relents and offers open account terms.

• Offering open account terms is one way to help increase market penetration and market share in foreign markets.

• If the seller has excess inventory offering foreign buyers open account terms is one way to reduce these inventory levels.

Some U.S. exporters are more willing to consider open account terms because they have opted to purchase export credit insurance. Others do so because the alternative involves losing the business to a competitor willing to take a chance and offer open account terms. One thing seems certain: Pandora's Box is now open, and more and more foreign buyers are going to insist on receiving open account terms or they will take their business elsewhere.