Is CAD a Cheaper Way to Finance Imported Goods?
Cash Against Document (CAD) financing is a way for companies importing products to procure goods before receipt. Cash Against Documents, also known as Documents Against Payment, is much cheaper than a letter of credit in international trade transactions.
To learn more about trade financing, visit our previous article, “What is Bankers Trade Financing.”
The process for Cash Against Document financing is similar to real estate transactions, where a third party holds funds in escrow until the transfer of the title finishes. This intermediary relationship ensures the agent accepts the goods from the seller and retains them until the goods are quality checked and then paid.
Not only does Bankers Factoring act as the import financing intermediary, but we also supply the funds through purchase order financing and then invoice factoring.
Documents Against Purchase is a robust solution for international businesses to facilitate smooth vendor relations. Through CAD Financing, the exporters have a guarantee of payment for the goods shipped, and the importer is assured that they will receive the products purchased.
What is the CAD process?
Documents Against Purchase begins with the exporter or seller once the international buyer accepts the purchase order. The seller prepares the required shipping documents such as Bill of Ladings per country of origin and country of destination requirements. The Export Collection Form, Bill of Exchange, and documents from the freight companies are forwarded to the financial institution that the exporter uses.
Once the documents are sent, the merchandise is held with release restrictions from the importer until the payment is made to the seller’s financial institution. The seller retains ownership of the goods until the financial institution receives compensation.
CAD financing is a line of international financing advantageous to the buyer as they inspect the good before transferring the funds to the financial institution. Cash Against Documents financing protects buyers from accepting goods of lesser quality or quantity than agreed upon.
When the shipment and goods become approved, the buyer pays the financial institution a predetermined amount for the consignment, and the financial institution sends the funds to the seller while the buyer receives the title to the shipment.
Visit our previous article “What is Purchase Order Funding & Trade Import Financing?” to learn more about international trade financing.
Who benefits from CAD financing transactions?
International trade can be a complex business on both sides of the transaction. Purchasing goods overseas with a traditional credit line is ideal but virtually impossible to obtain when importing goods. CAD Financing with Bankers Factoring is the solution to ensure exporters get their money on time while the importer is not out the cash while for the goods.
Below are some benefits to CAD Financing with Bankers:
- Sellers/Exporters are guaranteed payment
- Buyers/Importers can inspect goods before making payment
- Bankers Factoring, a third-party control the shipment and payment process
- The buyer does not need to obtain a letter of credit
- Goods can be FOB, Foreign Country of Origin or FOB USA
- A financing solution when you lack working capital
To learn more about international trade financing, visit our previous article “Financing an Importing Business with PO Funding.”
Comparing cash against documents versus letters of credit
Letters of credit are another form of financing for international trade. Similar to CAD Financing, letters of credit benefit the exporter who is not providing credit terms. If the seller is unfamiliar with the buyer, there is no established credit history in international trade; no credit terms are extended. The problem with Letters of Credit are:
- A US based importer must put up the cash, or
- Be very bankable
- A LOC can be expensive
- A LOC is a rigid financing option
Visit our previous article, about offering credit terms to learn more about payment terms.
What are the cash against documents terms?
Cash Against Document terms are known to all parties to execute a successful transaction. The exporting party the shipping documents once the buyer places the purchase order. These documents are forwarded to Bankers Factoring and the importing freight forwarder. Bankers Factoring will hold the document until the shipment arrives, and then the buyer makes the payment for the shipment. The documents are given to the importer upon payment receipt, and the exporter receives payment.
Even though Bankers Factoring holds the shipping documents, the seller or exporter retains ownership until the money has been exchanged. The buyers cannot take ownership of the purchase order until they have the title and shipping documents.
Who pays for a CAD transaction?
Bankers Factoring helps facilitate this transaction by charging a small fee for the service. This small fee can be split since both the buyer and seller benefit from the CAD transaction. The complexity of international trade exposes many small importers to significant risks. CAD Financing provides protections for both sides of the deal, making the small fee to Bankers Factoring a solution where everyone benefits for all parties.
Are there any risks in a CAD transaction?
A CAD transaction is less expensive than a letter of credit, and the importer carries less risk than the exporter. Cash Against Purchase financing does not eliminate all risk for international trade transactions, but it reduces a significant amount of risk. The seller would assume some trouble if the buyer refused the delivery. If this did happen, the seller would have to take on the additional cost, such as returning the goods.
Below are some risks associated with CAD transactions:
- No guarantees buyer will take possession of goods
- The financial institution may release documents early
- Payment is final
- High shipping costs for rejected goods
What to look for in a CAD transaction funding company
Some banks do offer CAD or documents against acceptance financing, but their credit policies are much more stringent than Bankers Factoring. International trade transactions are complex, requiring an expert to facilitate this transaction. Many banks do not have the experience and knowledge as Bankers Factoring in facilitating international trade financing. With inexperienced CAD companies, you run the risk of fundamental errors that can be costly and disrupt your cash flow.
Bankers Factoring is transaction or deal-driven on imported goods. If the deal makes sense credit, profit, and risk-wise, we can fund your imported goods for sale in the US. Fulfill the order and take on bigger customer orders with documentary collections from a purchase order financing company that understands the unique needs of importers.