CAD in banking refers to Cash Against Documents, a payment term used in bank collections. It requires the buyer (drawee) to pay for the goods before receiving the necessary shipping documents. This method is also known as "payment at sight."
How CAD Works
The process typically involves these steps:
- The seller (drawer) ships the goods.
- The seller sends the shipping documents (like bill of lading, invoice, and insurance certificate) to their bank.
- The seller's bank forwards the documents to the buyer's bank, along with instructions to release the documents only upon payment.
- The buyer's bank informs the buyer that the documents have arrived and payment is due.
- The buyer pays the agreed-upon amount to their bank.
- The buyer's bank releases the documents to the buyer.
- The buyer can now claim the shipped goods.
Key Features of CAD
- Payment at Sight: The buyer must pay immediately upon presentation of the documents. This provides the seller with a significant level of security as they are assured of payment before the buyer gains control of the goods.
- Document Control: The buyer cannot access the shipped goods until they have paid for them and received the necessary documents from their bank.
- Bank Intermediation: Banks play a crucial intermediary role, ensuring that funds are exchanged for documents in a secure and controlled manner.
Advantages of CAD
- For Sellers:
- Reduced risk of non-payment.
- Faster payment compared to other methods.
- For Buyers:
- Ensures that the documents, and therefore the goods, are authentic before payment.
- Allows time to verify the shipment and prepare payment.
Disadvantages of CAD
- For Sellers:
- Risk remains if the buyer refuses to pay.
- For Buyers:
- Payment has to be made before inspection of goods.
- Potential delays in accessing goods if payment processing is slow.
Example
Imagine a company in China selling machinery to a buyer in the United States. The Chinese company ships the machinery and sends the shipping documents to their bank. The bank sends these documents to the US buyer's bank, with instructions to release them only after payment. Upon receiving notification, the US buyer makes the payment. Their bank then releases the documents, enabling the buyer to receive their machinery.
Conclusion
CAD provides a secure method for international trade, guaranteeing payment for sellers while ensuring that buyers receive necessary shipping documents upon payment. It strikes a balance between risk management and operational efficiency, relying on the intermediary role of banks for secure transactions.
