Who Benefits From Cash Against Documents (CAD) Transactions?
International trade can be tricky business on both sides of the border. Straight credit is ideal but usually impossible to obtain when trying to purchase goods from an overseas exporter. Cash Against Documents (CAD) financing is the solution that helps ensure that exporters get their money on time while importers get the goods needed for their business.
What does Cash Against Documents Mean?
Simply put, CAD financing is a method in which an importer pays for goods before receiving them. To ensure that both the parties are satisfied with the transaction, a third party accepts the shipping and title documents for the exported goods. These are not released to the buyer – or importer – until the payment is received. This situation is similar to real estate transactions, where an uninterested party holds money in escrow until the transfer of the home’s title is complete.
There is a benefit of CAD financing for both sides. The exporter is guaranteed the payment for the goods shipped, and the importer can ensure that they receive precisely the goods they paid for. This method eliminates the headache of having to try and resolve business transaction issues across borders, once that transaction is complete.
Comparing Cash Documents vs Letters of Credit
Letters of Credit are another financing method used to help facilitate international trade deals. Like with CAD financing, letters of credit benefit the exporter who is unwilling to offer open trade credit. One reason for this is because they’re unfamiliar with the importer, or that the buyer does not have a credible credit history.
The actual letter of credit is a formal letter provided by the importer’s bank, promising their financial support to the buyer and this gives the exporter the right to demand that the bank will pay for the shipment if the buyer does not pay. This can be a one-time purchase, or the buyer could establish a line of credit with the financial provider that allows them to make regular purchases from the same exporter.
The seller gets the most advantage from letters of credit, as their payment is virtually guaranteed unless there is a severe breach of the agreement they have made with the importer. For the buyer, this method affects their line of credit and credit score, potentially interfering with their ability to deal with other vendors or take out business loans to increase their productivity. For some who do not have a stellar credit score, the bank may even insist on a cash deposit to secure the amount listed on the letter of credit.
What are the Cash Against Documents Terms?
The terms and conditions for a successful CAD transaction are straightforward. The documents for the shipment are prepared by the exporter once the buyer places the order. Those documents are then sent to the financial institution that is facilitating the transaction and held until the shipment arrives and the buyer makes the payment of the goods. Once payment is received, the documents are given to the importer, while the exporter receives the funds.
Even though a third party is holding the shipping documents, the exporter retains ownership of the goods until the funds are transferred. The importer cannot take ownership of the property in the shipment until they are given the title and shipping documents.
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What is the Cash Against Documents Process?
The exporter or seller typically initiates the CAD transaction. Once the order from the international buyer is accepted, they will prepare the necessary shipping docs required by the country of origin and country of destination. A standard form that is included in these documents is an Export Collection Form. This Export Collection Form, a bill of exchange, and other shipping documents are forwarded straight to the financial institution that is used by the exporter.
Once the documents are sent, they are held with the provision that they cannot be released to the importer until the designated payment is made to the financial institution. The transaction is not complete, and the seller retains ownership of the entire shipment until the financial institution receives the payment.
What makes this form of international financing advantageous to the buyer is that they can inspect the goods before transferring the funds to the financial institution. This protects them by ensuring that the goods are of the quality promised and in the quantity that they had requested.
After approving the shipment, the buyer pays the financial institution the pre-arranged amount for the consignment. Once the payment is received, it is forwarded to the exporter while the importer receives all of the shipping paperwork and title to the goods.
Who Pays For a CAD Transaction?
The financial institution that helps to facilitate this type of transaction charges a small fee for the service. Since both parties benefit from a CAD transaction, it is not uncommon to see them split the cost. If not, the party responsible for the fee as per the original agreement is the one who pays the fee. Because of the complexities involved in international trade, and the protection, that CAD transactions provide for both sides of the transaction, the cost paid to the financial institution who acts as the intermediary is well worth the expense.
Are There Any Risks in a CAD Transaction?
Although a CAD transaction does eliminate most of the risk involved in international trade for both parties, it is more advantageous for the importer. Especially when compared to letters of credit. A CAD transaction is less expensive and does not have any effect on the importer’s available credit. The seller still assumes some risk in that the buyer could refuse the delivery. In this event, the exporter would then have to absorb the additional cost of having the goods shipped back to them.
What to Look For in a CAD Transaction Funding Company
While some banks do provide CAD services, they may charge higher fees than a private company. Plus, they may not have the experience and knowledge required to handle this type of international transaction. These are complex transactions that require a level of expertise that many banks simply do not have. A funding company like WIP deals with this type of transaction daily and is better equipped to handle the intricate paperwork involved. Plus, they have gained experience in international import and export that will prove invaluable in ensuring successful CAD transactions.