As a professional, I bring to you an article on “cash against documents agreement.”
A cash against documents (CAD) agreement is a payment term used in international trade. In a CAD agreement, the seller of the goods ships the goods to the buyer, and the buyer agrees to pay for the goods upon receipt of the shipping documents.
These shipping documents include bills of lading, inspection certificates, and commercial invoices. These documents are necessary for the buyer to clear the goods through customs and take possession of them. Once the buyer receives the shipping documents from the seller, they can instruct their bank to release payment to the seller.
A CAD agreement is different from other types of payment terms, such as cash in advance or letter of credit. In a cash in advance payment term, the buyer pays the seller before the goods are shipped. In a letter of credit payment term, the buyer`s bank guarantees payment to the seller, provided the seller meets certain conditions.
The advantage of a CAD agreement is that the seller does not have to wait for payment until the buyer receives and inspects the goods. This can be particularly beneficial for small businesses that do not have the cash flow to wait for extended payment terms. Additionally, a CAD agreement can be less expensive than a letter of credit, as it does not involve the same bank fees.
However, there are some risks associated with a CAD agreement. If the buyer does not pay upon receipt of the shipping documents, the seller may have difficulty collecting payment. Additionally, if the seller ships the goods before receiving payment, there is a risk that the buyer may refuse to pay or dispute the quality of the goods.
To mitigate these risks, it is important for both the buyer and seller to carefully review and agree upon the terms of the CAD agreement before proceeding with the transaction. The agreement should specify the types of shipping documents that will be required, the timeframe for payment, and any penalties for non-payment or dispute resolution.
In conclusion, a cash against documents agreement is a payment term used in international trade that allows the seller to receive payment upon shipment of the goods. While there are risks associated with this payment term, it can be a beneficial option for small businesses that need to maintain cash flow. It is important for both the buyer and seller to carefully review and agree upon the terms of the CAD agreement before proceeding with the transaction.