Cash Against Documents (CAD)

Cash against documents (CAD) is a payment term in international trade under which the buyer obtains the shipping documents, and with them the right to collect the goods, only by paying the invoice amount at the moment the documents are presented. In most cases the documents travel through banks under a documentary collection, and CAD is then essentially the same arrangement that bankers call documents against payment (D/P).

CAD sits between cash in advance and open-account trade. The seller keeps control of the goods until it is paid, but no bank promises payment, which is the main difference from a sight letter of credit. Its deferred-payment sibling is documents against acceptance (D/A), where the buyer gets the documents by promising to pay later. Bank-handled CAD transactions are normally subject to the ICC Uniform Rules for Collections (URC 522).

Think of buying a car where the dealer keeps the keys and logbook in an envelope at the front desk. You can see the car is on the forecourt, but you get the envelope only when you pay. Until then the car is still effectively the dealer's. That envelope is the set of shipping documents, and the front desk is a bank in the buyer's country.

The seller does not need to trust the buyer to pay, because the goods are locked behind the documents. But the buyer is not forced to pay either. If it walks away, the seller still owns the goods, which are now sitting in a foreign port, and has to deal with them from a distance.

1. The seller ships the goods and obtains a bill of lading made out so that the buyer cannot take delivery without it, typically to order or to the order of a bank.
2. The seller hands the documents, usually the bill of lading, a commercial invoice, a packing list and any certificates, to its bank with a collection instruction marked D/P. A sight draft may be included but is not always required.
3. The remitting bank sends them to a presenting bank in the buyer's country.
4. The presenting bank notifies the buyer, who may inspect the documents at the bank and then pays.
5. On payment the bank releases the documents, the buyer collects the goods from the carrier, and the funds are remitted to the seller.

URC 522 discourages mixing a draft payable at a future date with an instruction to release documents against payment, and requires the instruction to state clearly whether release is against acceptance or payment. In practice CAD is treated as a sight arrangement.

The phrase is also used for arrangements in which no bank handles the documents. In some commodity and bulk trades the seller presents documents directly to the buyer or its agent against payment. Elsewhere, buyers pay on receiving scans and the seller then arranges a bill of lading surrender. These variants keep the commercial idea of paying when the documents are ready, but they lose the protection of a bank controlling the originals and of URC 522, so the contract should state which form is meant.

• Seller. The main risk is non-acceptance: the buyer refuses to pay, perhaps because prices have fallen. The seller then faces port storage and demurrage, possible deterioration of the goods, and the cost of reselling locally or shipping them back. Country risk adds to this, since in markets with capital controls a buyer may pay in local currency while foreign exchange for the transfer is delayed.
• Buyer. The buyer pays before it has inspected the goods themselves, so it relies on the documents and the seller's honesty. A pre-shipment inspection certificate can reduce this risk.
• Banks. Banks act as agents with no payment obligation, but they must follow the instruction precisely. Releasing documents without payment can make the presenting bank liable.

Sellers often reduce the refusal risk by taking a deposit, choosing Incoterms under which they control freight and insurance, or buying export credit insurance that covers buyer default.

Because the seller waits for the documents to travel and the buyer to pay, banks offer post-shipment finance against CAD bills, advancing a share of the invoice with recourse to the seller if the buyer does not pay. For banks, the documents give useful insight into the trade, supporting trade-payment compliance checks on prices, goods and parties. In countries such as India and Pakistan, banks handling export collections also track the proceeds to meet export proceeds repatriation rules. CAD is one of several mechanisms grouped under the working term documentary trade payment.

• International Chamber of Commerce