Letter of Credit Forum

Cash Against Documents

The meaning – and therefore the process – of a Cash Against Documents transaction depends very much on who is asking the question, and of whom, however the literal interpretation of the phrase is that the buyer may only obtain controlling documents for the cargo on payment of cash. The use of actual ‘cash’ in the transaction would be rare these days but it is entirely possible.

In international trade, this method of payment is primarily used for seafreight shipments. It is generally inappropriate for goods sent by airfreight as the cargo will normally arrive well before the documents and a Release Letter (q.v.) may serve the seller better.  In a broad banking sense Cash Against Documents is a transaction in which the buyer assumes the title to the goods only upon paying the sale price in full and in cash; in this respect it is synonymous with a Documentary Collection where the seller sends the documents evidencing the shipment to the buyer’s bank and the buyer makes payment (via the bank) in exchange for these documents. The documents would normally be the commercial invoice (s) and perhaps other commercial documents such as a certificate of origin, packing list and insurance certificate and – crucially – a bill of lading.

The bill of lading restricts the buyer in that they cannot access the cargo without the bill of lading and they cannot obtain the bill of lading without paying for the documents. This is the seller’s security, but there remains the risk that the buyer may abandon the contract and never go to the bank to pick up the documents. The seller has a reduced risk in this case if the goods are generic i.e. if the seller can find another buyer relatively easily. Of course it becomes a major risk for the seller if the goods have been purpose-made for that specific buyer; in which case if the buyer abandons the contract the seller is compromised.

There are instances where the seller sends the documents through the carrier – often a freight forwarder – and requests that the forwarder only releases the documents on receipt of the payment instrument. While this may appear more convenient for the seller, it is hugely flawed in that the freight forwarder lacks the expertise to recognize a fraudulent banker’s draft and would take no responsibility for the value, currency or integrity of the instrument offered to them by the buyer (in exchange for the documents) in any case.

The preferred method is always that the seller makes shipment and then sends the shipping documents to his bank for collection of the payment. The seller’s bank sends the shipping documents, along with a collection instruction, to the buyer’s bank. On receipt, they send a collection notice to the buyer. Thereafter, the buyer either makes payment upon receiving the notice (and prior to taking possession of the shipping documents; thus a ‘true’ ‘cash against documents’ arrangement), or the seller accepts a time-draft irrevocably obligating the buyer to pay at a future date (termed a ‘documents against acceptance’ arrangement.) In either instance, it is only after payment or acceptance that the buyer receives the original shipping documents.

The major advantage of the Cash Against Document payment method, at least for the buyer, is the low cost of operation versus opening a Documentary Credit. The advantage for the seller is that they receive full payment prior to releasing control of the documents, although this is offset by the risk discussed above, that the buyer will, for some reason, abandon or reject the documents (or they will not be in order.) Since the cargo would already be loaded and moving (to generate the documents), the seller has little practical recourse against the buyer in cases of a refusal to take up the documents (recourse, if it exist, will flow from the seals contract and would involve a legal action in a foreign country – which could prove financially impractical.) Any payment against documents, however arranged, involves a high level of trust between the seller and the buyer and they should be considered and adopted only by parties well known to each other.

...but I hope it helps

cheers

phill

"…in the kingdom of the blind: what you see is what you get…”