Introduction to Payment Terms in International Trade

In the realm of international trade, things can quickly become very complicated. One thing, however, never goes out of style: getting paid. The faster payment methods go in an international transaction, the more important it becomes to be aware of various payment methods. CAD and LC, two incredibly popular payment terms, protect merchants to varying degrees and levels of freedom.

Understanding how each works might mean the difference between a smooth transaction and unnecessary risk.

Let's discuss these methods so you can safely choose the right one for your business.

Cash Against Documents (CAD)

What is CAD?

In Cash Against Documents (CAD), an exporter ships the goods along with the shipping documents, including the bill of lading to the bank. The buyer will then need to pay to the bank to get access to these shipping documents and take delivery of the goods. Thus, the seller keeps the possession of the goods until payment is done, providing protection against bad payments.

CAD Transaction Flow:

• Exporter sends shipment documents to the buyer's bank.

• The documents are sent to the buyer's bank.

• The buyer's bank is entitled to release the documents only after receiving payment.

• The buyer receives the goods after payment is confirmed.

Advantages & Disadvantages of CAD

Advantage: CAD is more convenient and cost-effective. CAD is recommended for firms which have established and reliable partners.

Disadvantages: CAD does not assure payment. Even after taking the goods, the buyer may still fail to pay and as a result, the seller could lose some amount of money. CAD v/s Other Payment Systems:

As opposed to an open account, CAD involves more security than the latter, but it is less secure than LC, wherein the bank guarantees the payment.

Letters of Credit (LC)

What is LC?

A Letter of Credit (LC) is a commitment from a bank to pay the exporter a specified amount as long as the exporter meets some conditions. It is commonly applied in international trade since it gives one high security in case the buyer will definitely pay once all stipulated conditions are met.

Types of Letters of Credit:

Confirmed LC: Both the buyer's and the seller's banks ensure payment, which gives additional security.

Unconfirmed LC: The buyer bank guarantees payment; the seller is at more risk.

Documentary LC: The payment is confirmed so far as the shipment documents are provided.

LC Transaction Flow:

• Buyer approaches their bank and applies for an LC.

• Issuing bank conveys the LC to the Exporter's bank.

• Exporters ship the goods and submit the documents required to the exporter's bank.

• The bank checks the documents, and if all is in order, forwards them to the buyer’s bank.

• The buyer’s bank verifies the documents and releases payment to the exporter.

This LC transaction process offers more protection to the seller compared to CAD, ensuring payment upon fulfilling contractual obligations.

Pros & Cons of LCs:

Pros: The bank guarantees payment, reducing risk for both the exporter and the importer, especially when dealing with new or unreliable partners.

Cons: LCs can be expensive and require significant paperwork, involving multiple banks and complex documentation.

CAD vs. LC: Which One is Right for You?

Risk Assessment for Exporters and Importers

CAD: The seller has more control, but the risk of non-payment is higher. The buyer can still deny payment even after receiving the goods.

LC: Mitigates the risk significantly since the bank will pay if the requirements are complied with. It becomes complex and expensive, though.

Cost Implications:

CAD: Lower fees on transactions; ideal for companies with close, trustable relationships.

LC: Multiple banks and documentation create higher costs, making it suitable for new or otherwise high-risk international transactions.

When to Use Each Method:

CAD: Suitable for long established relationships in which the buyer's side is reliable.

LC: Useful for new or otherwise high risk partners, or where transactions are more complex and would be needed as security.

Why Infinity is the Best Solution for Your Export Payment Needs

Cash Against Documents and Letters of Credit usually depend on the risk profile of your business and nature of relationships. Navigating the various payment terms, however, requires deep experience in the field. That's where Infinity comes in.

Let Infinity simplify your export payments—secure, cost-effective, and hassle-free, so you can focus on the things that matter most—growing your business.

Select Your Right Option for Your Business Today

Whether you are dealing with trusted partners or trying to reach new markets, Infinity makes sure that your international trade payments are safe, efficient, and cost-effective. We can guide you in making the right decision for your business.