Consignment vs Open Account payment Method
In Case of Trusted Importer which payment method would you choose from consignment and open account and why?
In case of trusted importer, I would prefer to choose Open Account payment method rather consignment for following reasons:
There is flexibility in Open Account mode of payment regarding payment terms. As time of payment will be decided with mutual consent, therefore; I’ll have the option to offer discount to the importer for early payment.
As there is a long-term business relationship, and the importer has a very good market reputation therefore, it is safe to opt open account payment method.
Importer’s creditworthiness can be confirmed also there is no political risk involved in dealing with the importer, therefore open account is suitable for this transaction.
There is option to discount open accounts receivable with factoring companies or other financial institution, therefore, if we need early cash flows, we can factorize open accounts receivable.
On the other hand, Consignment sales are very risky and there is no or very little control available to the exporter. Also importer is responsible for paying for the goods when they are sold. So there are chances that importer fails to sell goods in the market for certain reasons and exporter will have to bear the losses.
It is also difficult to Obtain sales proceeds or return of the goods if it is not sold.
If inventory and warehousing costs will bear by the exporter, any delay in the sale of goods will eat up the expected margin on export.