DP (Documents against Payment) payment terms, also known as Cash Against Documents (CAD), are a trade finance method where the exporter's bank instructs a presenting bank (the importer's bank) to release shipping and title documents to the importer only if the importer makes payment for the goods.
Here's a breakdown:
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Mechanism: The exporter sends the goods and related documents (bill of lading, invoice, etc.) to their bank. The exporter's bank then sends these documents to the importer's bank. The importer's bank notifies the importer that the documents are available. The importer makes the payment to their bank, which then remits the funds to the exporter's bank, who in turn credits the exporter. Upon payment, the importer's bank releases the documents to the importer, allowing them to take possession of the goods.
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Risk Allocation: DP terms offer a degree of security to both parties. The exporter retains control of the goods until payment is made, reducing the risk of non-payment. However, the importer bears the risk that the goods may not be as expected, as they are required to pay before inspecting the shipment.
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Compared to Letter of Credit (L/C): DP is generally considered less secure for the exporter than a Letter of Credit (L/C), as the importer's bank doesn't guarantee payment. The importer only commits to paying if they still want the goods when they arrive. If the importer refuses to pay, the exporter is responsible for reselling or returning the goods.
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Compared to Open Account: DP terms are more secure for the exporter than open account terms, where the goods are shipped before payment is due.
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Example: A US company (importer) buys textiles from an Indian company (exporter). Under DP terms, the Indian company ships the textiles and sends the shipping documents to its bank. The Indian bank forwards these documents to the US company's bank. The US bank notifies the US company that the documents are ready for release upon payment. The US company pays the US bank, which then transfers the payment to the Indian bank. The Indian bank then credits the Indian company's account. Finally, the US bank releases the shipping documents to the US company, allowing them to claim the textiles at the port.
In summary, DP payment terms represent a compromise between the exporter's desire for payment security and the importer's need for verification. It's crucial for both parties to understand the risks and benefits before agreeing to these terms.
