Security over goods and payment are the most telling requirements of the parties to the transaction. The buyer wants to ensure that the goods he ordered are what he receives while the seller wants to ensure he receives his payment in full and on time.
Most new relationships rely on a confirmed irrevocable letter of credit (L/C) since that is the most secure method of securing a transaction between two parties who are unknown to each other.
Under a letter of credit, the payment to the supplier is guaranteed by a bank provided the terms of the L/C are complied with. If the L/C is “confirmed” that adds the additional security of a guarantee from a bank in the suppliers’ own country.
None of these measures are cheap and as the relationship between a buyer and seller matures, it is generally agreed that the need for an L/C becomes less important. The buyer understands the goods he has been receiving under previous shipments comply with his requirements and the seller has not had any payment concerns.
If that is the case then the buyer will generally ask for a switch to “cash against documents or CAD payment terms”. In this case, the supplier retains a certain amount of security as he knows that he will receive his funds before the buyers is able to clear the goods through customs. That is because once the shipment has been given to the shipping firm and a “shipped on board” bill of lading has been issued the seller can present his documents to his bank who will send them (acting only as a glorified post office) to the buyer’s bank for settlement. The bank will not release the documents to the buyer until payment has been made.
A CAD payment can also be deferred in which case the agreement will be termed a documents against acceptance transaction where the buyer “accepts” that he has a liability to pay at a future date.
International trade can be a minefield for inexperienced importers or exporters but once the basics have been understood, it can prove to be a significant revenue stream to an expanding business.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”