|
Today, more than 40% of companies worldwide trade with eight or more countries/regions,
many with hundreds of individual suppliers. One result of the explosive
growth in global trade is a dramatic shift in transaction formats in the
international trade marketplace, which affects both ends of the supply chain.
Specifically, there has been a noticeable and ongoing transition from traditional
letters of credit (LC) to open account trade.
 Open
Account Trade - Global Situation
Open account trade has been proven to offer savings and enhanced efficiency
throughout the purchasing cycle, particularly for companies with a one-to-many
relationship between themselves and their overseas suppliers. It's easy
to see why open account is regarded as a win-win for buyers and sellers.
As buyers move their overseas suppliers from
LCs to open account (or lengthen
their existing open account terms), electronic disbursement services are
reducing buy-side transaction processing and vendor management expenses.
Open account trade enables the financial supply chain to work more in sync
with the physical supply chain. By providing greatly improved visibility
and transparency, it helps promotes liquidity for all stakeholders in the
purchasing cycle. The longer payment terms of open account can be detrimental
to a supplier's working capital needs. However, emerging financing programs
are giving suppliers a liquidity management tool that frees up borrowing
capacity while increasing their cash flow, reducing accounts receivable
and reducing days sales outstanding.
Open
Account Trade - Clearing Traditional Hurdles
Until recently, some rather daunting hurdles, including a lack of transparency
and apprehension about cross-border exposure, had limited international
open account trade. A significant improvement in technology and increased
visibility into the financial supply chain, however, have minimized these
concerns, making global business not only manageable but also profitable.
Today's buyers and sellers fully recognize the efficiency benefits of open
account trade. And they are moving quickly to make it the dominant payment
method in their cross-border supply chain management. Open account is only
expected to become even more prevalent, thanks to its ability to streamline
processes by eliminating the multiple parties involved in the flows, while
reducing the amount of documentation required in global trade transactions.
Open
Account Trade - New Environment, New Capabilities
With the dramatic increase in buyers and suppliers participating in international
trade, there is a corresponding need for risk mitigation on a global scale.
While open account trading is less complex than traditional letters of credit,
this simplicity brings with it increased operational and credit risk, since
there is less protection built into the process than traditional
LCs offer.
In addition, open account trading requires a greater degree of trust to
capitalize on its efficiencies, as well as substantially reduce the time-
and labor-intensive tasks, such as reconciliation, a strong, trusting relationship
must exist between buyers and suppliers. The greater technical capability,
deeper market knowledge and stronger client relationships required by global
open account trading can be intimidating for buy-side companies. As a result,
they are asking their financial partners to help protect the viability of
their supply chain. This has been especially noteworthy in light of recent
credit uncertainties worldwide - and the potential supply chain interruptions
that could result. In turn, financial institutions are offering ways to
accommodate their buy-side clients. Global banks are creating an end-to-end
link between corporate buyers in the UK or US, for example, and suppliers
in Asia and other parts of the world. They are developing new open account
platforms to facilitate straight-through processing and reduce operational
costs for their multinational clients. They are automating procure-to-pay
workflow and extending payment terms and helping clients reduce the cost
of goods sold. They are also focusing on revenue growth in extended markets
via outsourced credit/risk management.
Enhanced Open Account Trade
An emerging solution for the rapidly growing
open account arena is 'enhanced open account trade'. This operating platform,
offered by leading financial institutions, speeds up processing and relieves
the administrative burden for companies making the transition from LCs to
open account trade. Enhanced open account trade not only facilitates payments
for open account purchases, it also transforms and streamlines the reconcilement
process. Executives benefit from a financial institution's knowledge of
local trade practices, regulations and market risks. A well-designed enhanced
open account trade solution offers a robust platform of integrated services
to support transaction processing, communication and reporting and liquidity
enhancements for open account transactions. It greatly improves the accuracy,
speed, visibility and liquidity in the overall transaction process, resulting
in bottom-line benefits to both buyers and suppliers across the global supply
chain. With enhanced open account trade, importers and exporters across
the global supply chain can complete international transactions much
more efficiently - and at a fraction of the cost of using an LC, with is
to the benefit of both importers and exporters.
Open
Account Trade - Pros and Cons
Payment term of "open account" is the least secure method of trading for
the exporter, but the most attractive to buyers. Goods are shipped and documents
are remitted directly to the buyer, with a request for payment at the appropriate
time, which can be immediately or at an agreed future date. An exporter
in China in this case has little or no control over the process, except
for imposing future trading terms and conditions on the buyer. Clearly,
this payment method is the most advantageous for the buyer, in cash flow
and cost terms. As a consequence, Open Account trading should only be considered
when an exporter is sufficiently confident that payment will be received.
It should be noted that in certain markets, such as the United States Europe,
buyers will expect Open Account terms. The financial risk can often be mitigated
by obtaining a credit insurance policy to cover the potential insolvency
of a customer, that provides reimbursement up to an agreed financial limit.
There are a number of commercial insurers who specialize in this market
- contact your insurance representative for details.
Open
Account Trade in China - the Realty
The open account payment term is very difficult to be accepted by exporters,
manufacturers and suppliers in China unless the importer is an internationally
well recognized firm, e.g., among the fortune five hundred companies,
especially when you just started import from China, as the credit industry
in China is far from being matured. As an importer from western part of
the world, you may have to work hard to earn high degree of the trust from
the suppliers so that open account status with a small credit limit can
be achieved. Again, the chances for this are even slim. Therefore, you should
be prepared to take different formats of payment terms, such as letter of
credit, bank guarantee and bills for collections, etc.
|
