Open Account vs LC Cost Comparison

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Compare Open Account and Letter of Credit Costs Side by Side

One of the most fundamental decisions in international trade is how to structure the payment terms. Should you sell on open account and trust your buyer to pay, or should you insist on a letter of credit that guarantees payment but costs more? The Open Account vs LC Cost Comparison tool on ToolWard lays out the real costs of both approaches, helping you make an informed decision based on hard numbers rather than gut feeling.

Understanding the Two Payment Methods

Open account means the exporter ships the goods and the buyer pays later - typically 30, 60, or 90 days after shipment. It's the cheapest and simplest method for the buyer, but it exposes the exporter to credit risk. If the buyer doesn't pay, the exporter has already shipped the goods and has little recourse beyond legal action in a foreign jurisdiction.

A letter of credit (LC) is a bank-backed promise to pay. The buyer's bank issues the LC, guaranteeing that it will pay the exporter upon presentation of compliant documents. This virtually eliminates credit risk for the exporter but introduces costs: LC issuance fees, advising fees, confirmation fees (if the exporter wants a second bank's guarantee), amendment fees, and discrepancy fees. The buyer bears most LC costs, but they're often passed through in the form of higher prices or shared as a negotiated term.

What the Comparison Tool Shows You

Enter the invoice value, the payment tenor in days, the LC fees you've been quoted (issuance, advising, confirmation, document handling), and the cost of any risk mitigation you'd use under open account (such as export credit insurance or factoring). The tool produces a clear comparison table showing the total cost of each approach in both absolute terms and as a percentage of the invoice value.

It also calculates the cash flow impact. Under an LC with payment at sight, the exporter gets paid almost immediately upon document presentation. Under open account with 90-day terms, the exporter waits three months. The opportunity cost of that delayed payment - measured as the financing cost of bridging the cash flow gap - is a real cost that many exporters overlook. This tool quantifies it.

Who Should Run This Comparison

Every exporter who has been asked by a buyer to switch from LC to open account should run these numbers before agreeing. The buyer's argument is always that LCs are expensive and outdated, but the real question is: what does it cost you, the exporter, to take on the credit risk? If the answer is that export credit insurance plus the financing cost of delayed payment exceeds the LC fees the buyer would have paid, then open account is actually more expensive - a conclusion that surprises many exporters.

Import managers who are negotiating with suppliers can also use this tool to demonstrate the cost savings of open account and make a more compelling case for favorable payment terms.

A Practical Decision

A South African wine exporter sells $200,000 worth of wine to a UK distributor. The distributor wants 60-day open account terms. The LC alternative would cost approximately 1.2% in total fees ($2,400). Under open account, the exporter would need export credit insurance at 0.8% ($1,600) plus would lose two months of cash flow, which at a 12% annual financing cost equals $4,000. Total open account cost: $5,600 - more than double the LC cost. The tool makes this comparison instant and visual.

Making the Right Choice

The cheapest option depends on the specific circumstances: the buyer's creditworthiness, the country risk, the invoice size, and the payment tenor. For trusted buyers in stable markets, open account with insurance may win. For new buyers in high-risk markets, an LC provides security that no insurance fully replaces. The Open Account vs LC Cost Comparison tool on ToolWard gives you the data to make that choice confidently.