Which payment term places the most credit risk on the seller?

• A. Open account
• B. Letter of credit
• C. Documentary collection
• D. Cash in advance

Answer: (A)

Paying after shipment without any bank guarantee places the most credit risk on the seller. In an open account arrangement, the seller ships the goods and expects payment at a later date, such as 30, 60, or 90 days, with no guarantee from a bank that payment will be made. If the buyer delays or defaults, the seller bears the loss and may have limited recourse.

Other terms offer more protection. Cash in advance means the buyer pays before shipment, so there’s essentially no credit risk for the seller. A letter of credit involves the buyer’s bank guaranteeing payment to the seller as long as the seller meets the documentary requirements, shifting most of the payment risk to the bank. Documentary collection involves banks handling the exchange of documents and payment, which provides more protection than open account but less than a full bank guarantee.