What is Cash Against Documents?

Cash Against Documents (CAD) is a way to pay for things that are shipped between countries. It is used a lot in international trade. With CAD, the seller sends important shipping papers to a bank in the country where the buyer lives. The buyer has to go to the bank and pay cash to get these papers. Only then can the buyer pick up the stuff they bought.

How CAD works

Let’s say a company in China is selling toys to a store in the United States. The Chinese company and the American store agree to use CAD. This is what happens:

The Chinese company puts the toys on a ship or plane to send them to the US.
The Chinese company gives special papers about the shipment to their bank in China. These papers might be a bill of lading (a detailed list of what’s being shipped) or other documents.
The Chinese bank sends the papers to the American store’s bank in the US.
The American store has to go to their bank and pay the full amount in cash.
After the store pays, the bank gives them the shipping papers.
The store takes the shipping papers to go get their toys from the ship or plane.

Why use Cash Against Documents?

Good for sellers

CAD is really helpful for companies that are selling to buyers in other countries. It makes sure they get paid before the buyer gets their hands on the goods. The seller doesn’t have to worry that the buyer will take the stuff without paying.

Some risk for buyers

For buyers, CAD can be a bit more tricky. They have to pay the full price upfront before they even see the goods. The buyer has to really trust that the seller will send exactly what they promised.

Important CAD documents

There are a few key papers that get passed around in CAD transactions:

Bill of Lading

This is like a detailed receipt of everything that’s being shipped. It shows what’s in the shipment, where it’s coming from, and where it’s going. The Bill of Lading is super important because it’s proof that the shipment was sent out.

Commercial Invoice

The Commercial Invoice is the bill for the goods. It shows the agreed price and any other money stuff like shipping costs and taxes.

Certificate of Origin

This paper proves where the goods were made. It’s important because some countries charge different taxes or have special rules based on where a product comes from.

Packing List

The Packing List tells exactly how the goods are packed – how many boxes there are, what’s in each box, how much everything weighs, and so on.

The bank’s job in CAD

The banks on both sides – the seller’s bank and the buyer’s bank – play a big part in CAD. But they’re not doing the buying and selling themselves. They’re more like middlemen passing papers back and forth and handling the money.

Seller’s bank

The seller’s bank takes the shipping papers from the seller and sends them over to the buyer’s bank. They’re responsible for making sure the papers are in order.

Buyer’s bank

The buyer’s bank gets the papers and notifies the buyer. When the buyer comes to pay, the bank checks that the payment is good (like making sure a check will clear). If everything looks right, the bank takes the money and releases the shipping papers to the buyer.

Pros and cons of CAD

Advantages

Sellers get paid before buyers get the goods
Buyers can inspect the shipping documents before paying
Banks handle the money and documents, which adds a layer of security

Disadvantages

Buyers have to pay upfront
Process can be slower than other methods because of all the document shuffling
Banks might charge fees for their services

CAD vs other payment methods

There are a few other ways to handle payments in international trade:

Open Account

With an Open Account, the seller ships the goods and then the buyer pays later, like on a schedule. This is riskier for the seller because they’re trusting the buyer to pay up.

Letter of Credit

A Letter of Credit is like a special promise from the buyer’s bank that they’ll pay the seller as long as certain conditions are met. It’s more secure for the seller than an Open Account but not quite as secure as CAD.

Advance Payment

As the name suggests, with Advance Payment the buyer pays for everything before the seller even sends the goods. This is the safest option for sellers but buyers might not like it.