What does payment against documents mean?
Payment against documents (PAD, also known as cash against documents) is a method of export payment where the exporting entity passes an instruction to the presenting bank to surrender cargo title documents to the importer only if full payment is made by the importer against the invoice value or bill of exchange. In other words the importer can only take delivery of the cargo after making payment to the presenting bank.
Payment against documents procedure
- Seller and buyer agree on a contract of sale
- Seller arranges for the shipment to the buyer. The Seller must also hand over shipping documents to the remitting bank.
- The remitting bank will send the documents to the Buyer’s bank, also known as the presenter’s bank.
- The Buyer’s bank surrenders title documents to the Buyer after payment is made.
- The Buyer can take possession of the cargo.
- The Buyer’s bank makes the funds available to the Seller through the Seller’s bank.
Why use payment against documents method in international trade?
This method of payment is advantageous because it is easily put into use since it does not require a credit line with the bank. Procedurally it is easy for both the seller and the buyer. The costs and administrative fees of using this payment method is considerably lower than other methods such as documentary credit.
The biggest area of risk with using this method of payment is that the seller can choose to reject the cargo for no good reason and not make payment. This will result in a situation where the seller never gets paid while having to manage return of the cargo from the foreign port.
Difference between letters of credit and payment against documents?
Using letters of credit for payment is considered to be a safer method of payment than cash against documents. Hence letters of credit should be used if both seller and buyer do not have an existing relationship. However, letters of credit will involve more documentation and fees. Release of payment will also be slower. If both buyer and seller trust each other, cash against documents can be considered instead.