What is Cash Against Documents?

If your business is importing goods from overseas, it’s important to know what the term ‘Cash Against Documents’ (or CAD) means, as international vendors often request this method of financing as a way of protecting both parties legally and financially during business transactions.

In today’s article, we’ll be exploring what Cash Against Documents financing is, how the Cash Against Documents procedure works, the benefits and risks involved, and - importantly - how you can save money whilst adhering to Cash Against Documents payment terms.

What is Cash Against Documents?

Cash Against Documents, also known as ‘Documents Against Payment’, is a method of financing which requires the buyer (or importer) to pay for their goods before receiving them. In other words, there is no release of the product to the buyer – or importer – until the payment has been made, meaning both party’s responsibilities are equally fulfilled at the time of exchange.

The process is similar to buying a house, where a solicitor or other third party agent holds all funds in escrow until completion takes place. 

How does Cash Against Documents work? 

Now we’ve established what Cash Against Documents financing is, let’s break down how it works in nine simple steps. 

In general, the Cash Against Documents procedure is as follows: 

1 - The buyer and seller agree on the transaction, and the CAD payment terms, time frames and responsibilities (e.g. the Cash Against Documents process is to be completed in 60 days) are clearly defined for both parties. By this point, you should already have applied for your import licence in the UK and ensured your supplier has their export licence and all other relevant documentation ready to go. 

2 - Once the sale of goods has been agreed upon, the vendor (or exporter) ships the goods to the country or location of the buyer (or importer) within the agreed time frame. 

3 - The exporter then takes the ownership documents (usually in the form of a Bill of Lading, which details the type, quantity, and destination of the goods being carried) to their bank.

4 - The exporter’s bank then sends these legal documents to the importer’s bank. 

5 - The Importer will then pay (in cash) the purchase price for their goods to their bank and will receive the legal ownership documents.

6 - The goods are then ‘released’ to the importer, meaning the importer can claim ownership and receive the goods at customs.

7 - The importer's bank will pay the importer’s money (minus a service fee) to the exporter's bank.

8 - The exporter's bank will then pay that money (minus a service fee) to the exporter, and the sale is complete.

9 - Once the buyer makes payment, the bank will surrender the documents evidencing ownership of the goods.

What are the risks involved with Cash Against Documents?

There are a number of reasons why some international sellers prefer Cash Against Documents financing, as well as a fair few advantages for the importer too. For example, CAD helps ensure sellers get paid on time and gives buyers a chance to inspect their goods before paying for them. 

CAD financing is also generally much easier and cheaper for both parties than using formal documentary credit processes, as Cash Against Documents payment terms do not require any Letter of Credit (LC), especially when the transaction is taking place between smaller businesses. 

A note on Cash Against Documents vs Letter of Credit: There are a few key differences between Cash Against Documents and Letter of Credit terms. With Letters of Credit, the process is initiated by the importer, whereas exporters initiate the process when it comes to Cash Against Documents. Importantly, when Letters of Credit are used, banks have a more substantial role to play, as they are tasked with checking conditions before importers make any payment, rather than holding the cash. This typically makes Cash Against Documents financing much more affordable for both parties than Letters of Credit, due to lower bank fees.

That said, Cash Against Documents financing does come with an element of risk for both parties. The main risks involved with Cash Against Documents financing are: 

• There is no guarantee that the importer will pay to complete the transaction, meaning the exporter may lose money.

• Exporters may also lose money on shipping costs if their goods are rejected.

• As Cash Against Documents financing is done through banks, poor bank processes can sometimes grant documents to the importer prematurely.

Nevertheless, Cash Against Documents is still the preferred method of financing for thousands of international vendors (and importers) as it allows both parties to protect themselves in the event that the exporter does not ship the goods or the buyer does not pay. 

With CAD financing, shippers can ensure that ownership of their goods is only transferred to the buyer once the full payment has been made, while buyers can rest assured that their goods will be available to them from the moment that the payment is made.

Weighing up the pros and cons of Cash Against Documents, it is a method of financing generally preferred by sellers who don’t have a history of transactions with the buyer, for larger orders, or when the buyer is a new company or has a poor credit history. 

You’re ready to start importing from overseas

We hope today’s article has helped you understand how Cash Against Documents financing works, and has set you up to handle any Cash Against Documents (CAD) requests from international vendors with confidence. 

We hope you enjoy using Crezco to save money on payments too! Good luck and happy CAD financing.