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Documents against payment are used in import/export scenarios to provide security for a transaction between a buyer and seller. They are often based on a bill of exchange and involve a bank holding ownership documents until payment is made. However, there are still risks for the seller, such as the buyer receiving goods before payment or refusing to pay, leaving the seller with the cost of shipping them back. Despite these risks, documents against payment offer a way for sellers to protect themselves against non-payment.
Documents against payment help define a specific transaction of goods. They are often used in import/export scenarios. Documents serve as security for an agreement between a buyer and a seller.
Items known as documents against payment, or D/P, are a form of trade protection often based on a bill of exchange document. The bill of exchange sets parameters for the use of D/P and the general sale. The bill of exchange generally includes three parts. The first is the drawer, the part that sends the goods. The second party is the drawee, or buyer, and the third party is the beneficiary, in many cases the bank acting on behalf of the seller.
In a D/P scenario, the bank will hold the ownership documents for the goods until they are paid for. This arrangement provides additional security for the seller, with the bank acting as an effective intermediary for the trade. The buyer will often use a “bank draft” or similar payment method, where payment is guaranteed to be made against existing funds.
Despite the design of the documents against the payment process, experts reveal that the seller still has some significant risks. One is that the buyer could receive the goods before the process is complete. Another very common risk of a D/P setup is that if the buyer refuses to pay, the physical goods are still stuck in the destination country, and the seller foots the bill for shipping them back to where they came from. A failed D/P transaction could leave the seller scrambling to unload or sell the assets at their destination, where getting a fair market price could be difficult.
Regardless of the risks involved, D/P still offers a way for sellers to protect themselves against non-payment, in the sense that the buyer will generally not be able to take control of the goods without paying. This process is similar to any “document in lieu of payment” situation that may be the norm in other types of transactions, and in different fields where trusted commerce is a must. For example, a vehicle transaction process may be a similar situation, where actual ownership has much less to do with physical control of the vehicle than with the name that is registered on the vehicle title by the Department of Motor Vehicles. The private sale of used cars, where the car title is a kind of “document against payment,” benefits from additional paperwork in the same way that an export deal benefits from documents against payment.
Smart Asset.
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