Cash Against Documents (CAD) is a type of trade financing arrangement commonly used in international transactions, where the buyer must pay the seller before receiving the shipping documents that enable them to take possession of the goods. In this arrangement, the seller ships the goods and forwards the shipping documents to a bank or an agent, which then releases the documents to the buyer only after payment is made.

Key Aspects of Cash Against Documents (CAD):

1. How CAD Works:
   • Shipment of Goods: The seller ships the goods to the buyer and obtains the necessary shipping documents, such as the bill of lading, invoice, insurance certificate, and any other documents required for the buyer to take possession of the goods.
   • Submission of Documents: The seller submits these documents to a bank or a designated agent, along with instructions that the documents are to be released to the buyer only upon payment of the invoice amount.
   • Payment by Buyer: The bank or agent notifies the buyer that the documents have arrived and are available. The buyer must make the payment to the bank or agent, usually in the form of a wire transfer or another agreed method of payment.
   • Release of Documents: Once the payment is received, the bank or agent releases the shipping documents to the buyer. The buyer can then use these documents to claim the goods from the shipping company or customs.
2. Key Documents Involved:
   • Bill of Lading: A crucial document that serves as proof of shipment and allows the buyer to take possession of the goods upon arrival.
   • Invoice: The commercial invoice detailing the goods and the amount to be paid by the buyer.
   • Certificate of Origin: A document certifying the country where the goods were produced, which may be required for customs clearance.
   • Insurance Certificate: Provides proof of insurance coverage for the goods during transit.
   • Packing List: A detailed list of the contents of the shipment, used for customs and inventory purposes.
3. Benefits of CAD:
   • Security for Seller: The seller retains control over the shipping documents until payment is received, reducing the risk of non-payment.
   • Simplified Process: CAD is less complicated and less costly than other forms of trade finance, such as letters of credit, making it a preferred option for smaller transactions or for parties with an established business relationship.
   • Faster Transactions: CAD can speed up the payment process compared to open account terms, where the buyer has a longer period to pay after receiving the goods.
4. Risks and Considerations:
   • Risk to Buyer: T he buyer must make payment before obtaining the documents and before verifying the condition of the goods. If there are issues with the shipment, the buyer may have difficulty resolving them after payment.
   • Dependence on Trust: CAD transactions require a degree of trust between the buyer and seller, as the seller is shipping goods without immediate payment and the buyer is paying before receiving the goods.
   • Bank Involvement: While the bank acts as an intermediary to release documents upon payment, it does not guarantee payment or the quality of the goods. The bank’s role is limited to handling documents and funds as instructed by the seller.
5. Comparison with Other Payment Methods:
   • Letter of Credit (LC): Unlike CAD, where payment is made against documents directly, an LC involves a commitment from the buyer’s bank to pay the seller upon presentation of specific documents, offering more security but at a higher cost.
   • Open Account: In open account transactions, the goods are shipped before payment, with the buyer agreeing to pay within a certain period after delivery. This method is riskier for the seller compared to CAD.
   • Advance Payment: The buyer pays for the goods before shipment, which is the opposite of CAD. This method is riskier for the buyer but provides maximum security for the seller.
6. When to Use CAD:
   • Established Relationships: CAD is often used when the buyer and seller have an established relationship and trust each other, but the seller still wants some assurance of payment before releasing the goods.
   • Shorter Payment Cycles: CAD is suitable for transactions where quick payment is expected, helping sellers maintain cash flow while providing buyers with some assurance that the goods have been shipped.
   • Moderate Risk Transactions: CAD is often used in situations where the transaction risk is moderate, such as when dealing with repeat customers or when the buyer’s financial stability is well-known to the seller.
7. Steps in a CAD Transaction:
   • Negotiation: The buyer and seller agree on the terms of the sale, including the use of CAD as the payment method.
   • Shipment: The seller ships the goods and prepares the necessary documents.
   • Document Submission: The seller submits the documents to their bank or agent with instructions for release upon payment.
   • Notification: The bank or agent notifies the buyer that the documents are ready for release upon payment.
   • Payment: The buyer makes the payment to the bank or agent.
   • Document Release: The bank or agent releases the documents to the buyer, allowing them to claim the goods.

In summary, Cash Against Documents (CAD) is a payment method used in international trade where the buyer must pay the seller before receiving the shipping documents necessary to take possession of the goods. CAD offers security to the seller by ensuring payment before the release of documents, while also providing the buyer with some assurance that the goods have been shipped. It is commonly used in situations where there is a moderate level of trust between the parties, and the transaction involves a straightforward exchange of goods and payment.