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International Open Account Terms
Most U.S. based companies do not have the kind of market power that would enable them to dictate terms of sale to their foreign customers. Some of the reasons companies offer open account terms to foreign customers include:
- The need to meet competition. If foreign suppliers can offer similar products on terms other than letter of credit or cash in advance, U.S. exporters will be in a weak competitive position if they are not able to match the terms being offered by the competition.
- Offering open account terms sometimes allows the seller to increase the purchase price. To some extent, a higher price and higher profits margins will offset some or all of the risk associated with offering open account terms.
- In cases where the U.S. supplier insists on letter of credit terms, buyers may insist that the seller pay or at least share the cost of obtaining the L/C. These costs can be avoided if the seller offers open account terms.
- Offering open account terms is one way to help increase market penetration and market share in most if not all foreign markets. If a seller has surplus inventory, offering foreign buyers open account terms is a way to encourage customers to purchase more on open account terms.
Some U.S. exporters are more likely to consider open account terms because they have export credit insurance. Others creditors do so because the alternative involves losing the business to a competitor willing to take a chance and offer the applicant or customer 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.
© 2011 by Michael C. Dennis. All Rights Reserved. Mr. Dennis is the author of "1001 Collection Tools and Tips" and can be reached by email at mcdennis13@yahoo.com