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Cash against documents

5 MIN READ
Apr 14, 2023

If you are an importer of manufactured products, your suppliers may ask you to pay them on the basis of "cash against documents" or "CAD".

Here we explain how CAD works in practice and how it is used in trade finance.

Read to the end of the post to find out about the modern alternative to cash against documents which is "cash against data" - and how cash against data can be used to generate significant savings for corporate buyers of manufactured products.

Cash against documents system

What is cash against documents?

CAD or cash against documents is contractual term that the buyer and supplier can agree which requires the buyer to pay the supplier before delivery of the goods (but after handover) on the basis that documents are provided conforming to the buyer's expectations.

It can work well for both parties:

What documents can be involved?

There are typically three main documents that a buyer will request:

The buyer will usually set out the details of the goods that should be reflected in these documents (eg: descriptions of the goods, quantities, prices, latest shipment dates and so on).

Buyers may also request other documents, such as certificates, inspection reports and so on - in order to confirm that the goods are going to be as specified.

CAD as a basis for payment

Cash against documents can be used as a pre-agreed basis for payment by the buyer as term of the contract with the supplier.

This can provide a supplier with considerable comfort that it can be paid before handing over control of the goods involved to the buyer - receiving cash against documents - and only then releasing the goods to the buyer.

Documentary collection

Suppliers sometimes do not want to provide the buyer with the specified documents directly, since certain documents can carry with them rights to collect the goods - for example, an original bill of lading.

In this situation, the buyer and the supplier might agree a documentary collection. This is also a cash against documents process, but it is handled between the buyer's bank and the supplier's bank.

Documentary collection can be time consuming and expensive to operate as there are a number of steps and communication between the parties can take time. A similar process can be organised using "cash against data" which is a real-time and direct data connection between the supplier and the buyer to check the documents - and so it is much quicker and cheaper for all the parties.

See here for a description of a documentary collection service.

CAD as a basis of trade finance - LCs

Cash against documents is also at the heart of documentary credits or letters of credit.

Letters of credit are complicated and there are many variations. But a typical letter of credit to support a transaction in manufactured goods operates as follows:

Letters of credit and documentary collections have become less popular because they take time to operate and are expensive. See here for a description of a letter of credit.

Cash against data - an upgrade

Cash against data is similar to cash against documents - but real-time, low-cost and efficient for all parties.

The supplier collects up the documents and then digitizes them. The supplier sends scans of the documents and the data to the buyer warranting their correctness. The buyer makes a decision on approving payment based on what is sent by the supplier.

This is efficient and low cost because the buyer and supplier deal directly with each other and the data can flow almost instantly after shipment. Since the documents are digitized, the data can also be used, under buyer control, to automate the process.

Instead of weeks, the process takes hours. Literally:

Cash against data - trade and supply chain finance

As explained above, cash against documents and cash against data are techniques which enable suppliers to get paid upfront and before delivery.

This is good for suppliers and usually saves money for both buyers and suppliers because it is more efficient than the supplier providing credit.

In fact, the quicker the supplier gets paid, usually the lower the costs for all the parties involved.

But buyers, for many good reasons, often want to pay suppliers later - see here about supply chain finance.

This is where the power of cash against data becomes visible.

Cash against data can be used with financiers to enable suppliers to be paid immediately (by the financier) giving the buyer time to pay.

Using cash against data, corporate buyers can confirm very early, efficiently and with high levels of automation that the invoice is approved for early payment to the supplier.

This means that early payments to suppliers are truly early, utilisation of supply chain finance programs is high, and all suppliers can be included because of the high levels of automation which a data-driven approach supports.

Cash against data is a modern version of cash against documents - and it delivers significant wins for corporate buyers by making their supply chains more resilient, reducing the cost of what they buy, and enabling them to manage working capital more efficiently.

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