Canadian Accredited Insurance Broker (CAIB) Three Practice Exam

Why might a seller agree to an Open Account payment method?

1. The buyer is new and unproven

2. The buyer has a reliable history of purchases

3. The goods are expensive and require immediate payment

4. It avoids legal complications during shipping

The correct answer is: The buyer has a reliable history of purchases

A seller might agree to an Open Account payment method primarily because the buyer has a reliable history of purchases. This method indicates a level of trust and confidence in the buyer's ability to fulfill their payment obligations. If a buyer consistently demonstrates reliability through previous transactions, the seller may be more inclined to extend favorable payment terms, such as Open Account, which allows the buyer to defer payment for goods received. Sellers typically assess the risk before entering into agreements of this nature. When a buyer has established a strong track record, including timely payments and consistent order patterns, it can justify the risk of offering products on credit terms without requiring upfront payment. This arrangement can facilitate easier transaction flows and potentially foster a stronger business relationship. In contrast, a new and unproven buyer may not provide sufficient assurance to the seller, making them less likely to agree to an Open Account. Additionally, the nature of the goods, such as their expense, generally necessitates immediate payment in many cases rather than deferral. Lastly, avoiding legal complications during shipping is not directly related to the Open Account payment terms since shipping and payment arrangements can be managed separately and would not influence the seller's willingness to extend credit based solely on the buyer's history.