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Definition: Cash Against Documents (CAD)
Cash Against Documentation (CAD) methodology of payments is often used in international trade where the buyer and seller are unfamiliar with each other. To gain confidence in each other, both parties signs an agreement and banks facilitate the transaction between them.
Today business is not only limited to the boundaries of one nation. It has expanded worldwide and producers are exchanging goods and services for their benefits. Since the trade is happening across borders, the chances of default by the importer increases.
In CAD, seller retains the ownership of the goods until the payment is cleared from the buyer side.
Let us say that Mr Abc from India wants to import cotton from Pakistan where Mr Xyz is a major exporter. Both of them are trading for the first time with each other and approach their respective banks for a guarantee.
• Mr Xyz produces the cotton as per the order and ships it to India. He is still the owner of the cotton he produced. While shipping, the carrier issues him a bill of lading which he deposits to his bank in Pakistan.
• Mr Abc, unaware of the developments, got a notification from his bank in India that the documents are available for him, but he needs to make the payment to the bank prior getting the delivery.
• After making the payment, Mr Abc becomes the new owner of the goods and collects the documents from the bank. These documents are necessary for him to claim the ownership and receive the goods from the port where the shipment has arrived.
• At the same time, Mr Abc’s bank in India transfer the payment to the bank in Pakistan which are further credited to Mr Xyz.
This way a secure exchange of goods is carried out between exporter and importer.
Advantages of CAD
• Offers payment security to the exporter as banks retain the documents until the payment is made by the importer
• It is less complicated as compared to other payment methods like letter of credit
• Less expensive than it’s alternative method letter of credit
• Payment to be done only after the goods are arrived at the port
• Deferred payment option is also available under usance bill of exchange