International Trade (Intl Trade) 101: Payment Methods Open Account Most BuyerFriendly Payment after Delivery Risks When to Use

What This Is

Open Account is a payment term where the buyer pays the seller after receiving the goods, without any financing or security. This is the most buyer-friendly payment term, as it allows the buyer to inspect the goods before paying. However, it also means the buyer bears all the risks, including non-payment or payment disputes. For example, a US importer buys a shipment of electronics from a Chinese exporter under Open Account terms. The goods arrive, but the importer discovers that they are defective. The importer refuses to pay, and the exporter sues for non-payment.

Key Terms & Rules

• Open Account: A payment term where the buyer pays the seller after receiving the goods, without any financing or security.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• LC (Letter of Credit): A payment guarantee issued by a bank on behalf of the buyer, which ensures payment to the seller upon presentation of compliant documents.
• DAP (Delivered at Place): An Incoterm where the seller delivers the goods to the buyer at a specific place, and the buyer is responsible for unloading and clearing customs.
• FOB (Free on Board): An Incoterm where the seller delivers the goods to the buyer on board a vessel at a specific port, and the buyer is responsible for main carriage.
• Duty: A tax levied on imported goods by the customs authority of the importing country.
• HS (Harmonized System) Codes: A standardized system for classifying goods for customs purposes.
• Incoterms Allocation: The rules that govern the allocation of costs and risks between buyers and sellers under different Incoterms.

Step-by-Step Process

1. Negotiate Open Account Terms: The buyer and seller agree on Open Account terms, which include the payment amount, due date, and any other conditions.
2. Ship Goods: The seller ships the goods to the buyer, and the buyer receives them.
3. Inspect Goods: The buyer inspects the goods to ensure they meet the agreed-upon quality and quantity.
4. Pay Seller: The buyer pays the seller after inspecting the goods and confirming that they meet the agreed-upon terms.
5. Clear Customs: The buyer clears customs and pays any applicable duties and taxes.

Common Mistakes

• Mistake: Assuming Open Account is risk-free.
• Correction: Open Account is the most buyer-friendly payment term, but it also means the buyer bears all the risks, including non-payment or payment disputes.
• Mistake: Confusing CIF and CIP.
• Correction: CIF (Cost, Insurance, and Freight) means the seller pays for the main carriage, insurance, and freight, while CIP (Carriage and Insurance Paid To) means the seller pays for the main carriage and insurance, but not freight.
• Mistake: Misusing "free on board" with air freight.
• Correction: "Free on board" is an Incoterm that applies to sea and inland waterway transport, not air freight.

Exam / Certification Tips

• Tricky Distinctions: Be able to distinguish between different Incoterms, such as FOB, CIF, and DAP.
• Confirmed vs Unconfirmed LC: Understand the difference between confirmed and unconfirmed LCs, and when each is used.
• DPU Successor to DAT: Know that DPU (Delivered at Place Unloaded) is the successor to DAT (Delivered at Terminal), and understand the implications of each.

Quick Practice Scenario

A Chinese exporter sells a shipment of electronics to a US importer under FOB Shanghai terms. Who pays for the main carriage?

Answer: The buyer pays for the main carriage.

Explanation: Under FOB terms, the seller delivers the goods to the buyer on board a vessel at a specific port, and the buyer is responsible for main carriage.

Last-Minute Cram Sheet

• Open Account: A payment term where the buyer pays the seller after receiving the goods, without any financing or security.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• LC (Letter of Credit): A payment guarantee issued by a bank on behalf of the buyer, which ensures payment to the seller upon presentation of compliant documents.
• DAP (Delivered at Place): An Incoterm where the seller delivers the goods to the buyer at a specific place, and the buyer is responsible for unloading and clearing customs.
• FOB (Free on Board): An Incoterm where the seller delivers the goods to the buyer on board a vessel at a specific port, and the buyer is responsible for main carriage.
• Duty: A tax levied on imported goods by the customs authority of the importing country.
• HS (Harmonized System) Codes: A standardized system for classifying goods for customs purposes.
• Incoterms Allocation: The rules that govern the allocation of costs and risks between buyers and sellers under different Incoterms.
• ⚠️ Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.