How does an open account function in international trade?

An open account in international trade refers to a scenario where the seller ships goods to the buyer without requiring upfront payment. This method allows the buyer to receive the goods and then pay for them at a later date, which makes it considerably advantageous for buyers as it improves their cash flow and permits them to obtain goods without immediate financial outlay.

This arrangement hinges on a high level of trust between trading partners, as the seller essentially extends credit to the buyer. The seller takes on the risk that the buyer may not pay after receiving the goods, which is why this option is often used only when the buyer has a strong financial standing or a well-established relationship with the seller.

In contrast to an open account, requiring full prepayment before shipment, using third-party financing, or demanding immediate payment upon receipt signifies a more cautious approach and places more risk onto the buyer. These arrangements often reflect a lower level of trust or a higher perceived risk in the transaction.