CAD, short for “Cash Against Documents”, is a payment method in which banks are used for intermediation in terms of payment and transfer of the export documents from the exporter to the importer. It’s also called Documents Against Payment (DAP).
In CAD, the exporter designates its bank (remitting bank) to forward export documents to the importer’s bank (collecting bank) with an instruction. According to the instruction in question, the collecting bank releases the documents to the importer when it makes the payment for the goods.
Because in CAD the transaction is carried out by the banks on behalf of the buyer and seller, it’s a relatively balanced method that allocates risks to both parties.
Document Against Acceptance
If the importer doesn’t want to pay the amount due at sight, there’s an option to facilitate such kind of transaction called DA (Document Against Acceptance). DA is a variation of CAD which serves as an alternative to DAP/CAD when the parties agree that the payment will be made to the exporter on a later date; for example 45 days after B/L.
If the parties agree on DA, the exporter sends a draft or bill of exchange to the importer. The importer accepts the draft and sends it back to the exporter; only then the importer can take the documents from the collecting bank.
As per the contract, if the draft is confirmed by the bank it means that the collecting bank guarantees it to make the payment even when the importer fails to do so. If it’s not confirmed by the collecting bank, there’s no guarantee the payment will be received. In that case; neither does the exporter get its money, nor does the importer get the documents and clear the goods.
How CAD Works
- Both the exporter and importer agree on CAD payment term
- The exporter ships the goods to the importer
- The exporter prepares a form which instructs when and on what conditions the collecting bank releases the documents (commercial invoice, packing list, movement certificate, certificate of origin, bill of lading etc.) to the importer. It collects all the documents and presents them to its bank (remitting bank) to send to the collecting bank.
- Collecting bank receives the documents and releases them to the importer on payment for the goods.
- The importer receives the documents and clears the goods at customs.
- Collecting bank forwards the amount to remitting bank and remitting bank makes the payment to the exporter.