The topic of moving to open account payments comes up frequently in conversations with customers. Many companies are making the move deliberately from documentary credit to open account payment terms aggressively, except where local regulations require the documentary credit, such as Bangladesh or Pakistan. Other companies are moving more slowly to open account payments, usually because they have suppliers who rely on the documentary credit as collateral for pre-shipment, or packing credit, financing. Thus, the move to open account payments is linked often to the working capital position of the supplier: those with strong cash positions will welcome open account payment terms as a mean of reducing their payment expense; those with weaker balance sheets will want to retain the documentary credit for the access to affordable financing it provides.
Many companies do not have a homogeneous supplier pool. Typically there are a few suppliers providing the majority of the goods to an importer, with many more suppliers providing seasonal or specialty goods. It is not uncommon to see an 80/20 or even 90/10 ratio where ten percent of suppliers are selling up to ninety percent value of goods to a customer.
When companies ponder the move to open account terms, they often go through their sourcing or merchandising groups, firstly, to communicate their intentions and, secondly, gather feedback. All too often the sourcing managers are contacting the largest suppliers, those who would gladly move to open account, at the expense of the smaller suppliers, who still rely on the documentary credit. It is only when the company starts to implement an open account payment that they get the push-back and find that their high goals for conversion to open account do not meet the mark. Though small, suppliers providing that hard-to-source good will have a lot of pull with his sourcing contact at his customer.
Thus, the ability to move to open account payments may require that the customer becomes mindful of how some of their supply base funds their working capital to manufacture the goods they sell to their customer. Is the funding required for acquiring raw material or does the supplier want to accelerate its receivables to improve its cash flow, or both? As companies move into open account payments, unlike under traditional documentary credit-based financing, importers have to become conversant in supplier finance and working capital management in order to achieve lower import payment expense.
