Also known as an applicant or accountee, an account party is a buyer who applies to a bank for a letter of credit. Once the application is approved, the applicant may present the letter to a seller, also known as the beneficiary or the accredited party, as proof that payment will be tendered for any goods purchased. This type of arrangement is often utilized when the buyer and seller are located in different countries.
One of the most common examples of an account party is an individual or business that engages in the import of goods from a seller’s country to the buyer’s place of business in a different country. The idea behind the letter of credit is to provide assurance that even if the buyer should default on the purchase, the bank that issued the credit letter will honor the obligation and remit payment to the seller. This is especially important when the buyer and seller have not conducted business with one another in the past, and are still in the process of forging a business relationship.
Sellers often require the account party to supply a letter of credit, even if there is a well-established relationship between the two parties. In some cases, the letter is necessary to comply with export regulations that the seller must observe as part of his or her business operation. At other times, the letter may be required due to the political climate in the nation where the buyer resides. In both scenarios, the requirement of the letter of credit has nothing to do with the amount of confidence the seller invests in the buyer, but in the possibility of external events taking place that would interfere with the successful completion of the transaction.
While the bank issuing the letter of credit is guaranteeing that the seller will be paid, that does not mean the account party may default without having some responsibility to the bank. Once the bank has settled with the seller, the institution will normally begin proceedings to recoup the purchase amount from the account party. This may be accomplished by withdrawing funds from the buyer’s accounts that are placed with the bank, or taking whatever legal action is necessary to cover the defaulted payment.
In the event that the importer works through a finance company or other third party to secure the bank letter of credit, each party in the process may be identified by a different term. The buyer would be referred to as the account party, while the finance company or third party would be designated as the applicant or accountee. The seller who ultimately is due a payment would be referred to as either the accredited party or the beneficiary.