Documents Against Payment

Documents against payment procedure indicate those documents required to facilitate trade between two parties, importer and exporter. It refers to documents available to the importer against payment necessary to receive and collect the shipped goods from a port or other location.

Documents against payment definition explain a method for documentation and collection of documents on payment to facilitate trade. On the other hand, documents against acceptance or a time draft accepted by the buyer legally obligate them to make payment for goods sometime soon, allowing them to take possession of goods from the exporter without immediate payment.

• Documents against payment procedure explain the transaction of payments and shipping documents in international trade and business cases.
• It is a measure that primarily protects the interests of the sellers and assures them of receiving payment from the buyer or importer on the shipping sight. In addition, it eliminates the delaying of payments to a later date.
• This mechanism is helpful, especially in countries with weak measures to enforce contracts and ensure supplier payments. Thereby, banks in the respective jurisdictions of the importer and exporter facilitate the exchange of shipping or other documents in return for payments.

Document against payment process flow explains the transaction of payment and goods between a seller and buyer. Firstly, the seller and buyer agree upon a price that confirms the purchase and starts the supply chain. Additionally, the two parties also decide the payment method and timeline.

In case of documents against payment at sight, the exporter generates a sight draft or a bill of exchange. It is a document that ensures immediate trade financing and payment for the exporter. Comparatively, in case of a time draft or documents against acceptance, the buyer will delay the payment to the exporter to a further date.

The next step in the process involves shipment. The exporter or seller of any good holds the initial ownership of the good until the buyer makes the payment. Thus, in documents against payment process flow, a sight draft obligates the importer to make the payment immediately to the importer’s bank before possessing the goods.

Hence, the parties facilitating the D/P process or transaction are the exporter, importer, exporter’s bank, and importer’s bank. The presence of a bank regulates and speeds up the transaction process. The importer’s bank is also known as the collecting bank. It collects the required document from the exporter’s bank and processes the payment to the exporter’s bank after collecting it from the importer.

Similarly, after shipping the goods to a port or freight carrier, the exporter submits necessary documents with instructions to the exporter’s bank. The exporter’s bank passes these documents to the importer’s bank with the same instructions from the exporter.

Thus, per the decided payment schedule, the importer shall collect these documents after transacting the payment to the importer’s bank. As the importer or buyer accepts the time draft or sight draft, it completes the transition of goods.

For instance, Apple specializes in consumer electronics and software. Thus, to facilitate the production of consumer electronics, it imports semiconductors from Taiwan for its production units in China. As a result, Apple will place a huge or bulk order with a Taiwanese seller. The seller will then generate either sight or a time draft for the buyer, i.e., Apple.

Although, Apple might also opt for a letter of credit to facilitate this transaction. In such a case, Apple will ask its routine bank to initiate a line of credit for its payments to a Taiwanese supplier. However, once both parties agree on the amount and payment schedule, the Taiwanese supplier will generate a bill of exchange or draft. This bill will highlight the terms and conditions that the buyer shall abide by.

Thus, the bank of the Taiwanese supplier will hold the ownership documents of the semiconductors shipment and pass these to Apple’s or the importer’s bank only when it makes the payment or accepts the obligation to make payment later.

Hence, banks have an extremely important role in such transactions between buyers and sellers in different countries. It acts as a crucial middleman that guarantees payment to the sellers and follows the parameters set up by the seller.

Let us compare the advantages and disadvantages of using the documents against payment methods in facilitating trade,

Let us compare and understand these three processes of transacting payments with their difference and similarities,

1. All three processes assure the sellers of receiving payments from the buyers.
2. Mostly, banks are the intermediaries in all three processes.
3. The buyer guarantees the bank in case of a letter of credit or documents against acceptance that they possess the funds or ready money to make the payment.
4. In the case of D/P, the buyer shall make the payment immediately to the bank to receive the shipping documents.
5. The importer’s bank demands the buyer to accept the time draft, which may delay the payment for the seller, but in the case of D/P, the seller receives the payment as the buyer receives the goods.
6. The banks may charge an additional fee to facilitate all three payment processes. In the case of the letter of credit, the fee or charges is usually a percentage of the total credit amount.

This has been a guide to What is Documents Against Payment and its meaning. We explain its advantages & disadvantages, an example, & compare it with a letter of credit. You may also find some useful articles here:

• Escrow Payment
• Transfer Payment
• Lump-Sum Payment