You’ve been doing business with a customer in a specific country for years based on a Letter of Credit, and everything runs smoothly. They are satisfied with the products you supply, and you receive payment promptly. So far, so good.

Now, your customer asks to simplify, speed up, and reduce the cost of the process by replacing the L/C with CAD. What does this potential change in payment method mean for you as an exporter?

First, it must be investigated whether a change is possible at all. It may be that the country in question is required to work with a Letter of Credit (L/C). If the government of the destination country requires a Letter of Credit (L/C), that is binding. In that case, it is not possible to simplify the payment to Cash Against Documents (CAD).

The difference between an L/C and CAD

  • A crucial difference between a Letter of Credit (L/C) and Cash Against Documents (CAD) concerns the security of payment. With an L/C, the order amount is reserved by the bank. This means that once you, as the exporter, submit the documents that meet the L/C conditions, the bank guarantees payment.
    This is not the case with CAD. The order amount is not blocked. If the buyer does not have sufficient funds at the time of document transfer, you run the risk of not receiving payment;
  • While Cash Against Documents (CAD) offers simplicity, especially in documentation, the Letter of Credit (L/C) is a powerful instrument for ensuring accuracy and reliability. The detailed document requirements of an L/C, although strict, enforce precision and minimize risks by providing a clear blueprint for all parties involved, including carriers.
    This structured approach significantly reduces the chance of misunderstandings and errors, resulting in smoother and safer transactions. Unlike CAD, where the bank primarily focuses on the presence of documents, an L/C guarantees that all specified conditions are met, giving both the exporter and the importer peace of mind.

Take control of the content of the L/C yourself

But know that the L/C process does not necessarily have to be extensive. Try to opt for the simplest possible variant, so only include documents that are really necessary to mention within an L/C.

Other documents can then be sent directly to the customer, outside the L/C. Even when an L/C does require it, you as an exporter have the opportunity to have changes made to the L/C and to remove documents from the L/C or to have clauses amended.

Cash Against Documents (CAD) vs. Documentary Collection

Although the terms Cash Against Documents (CAD) and Documentary Collection are often used interchangeably, there is a subtle difference:

  • CAD specifically refers to the type of documentary collection where the buyer pays immediately upon receipt of the documents (Documents against Payment or D/P);
  • Documentary Collection is the overarching term for the process where documents are exchanged through banks in return for payment.

In essence, CAD is therefore a specific form of Documentary Collection, with the emphasis on immediate payment. However, in theory, CAD can also take place outside direct banking processes.

Conclusion

The choice between Cash Against Documents (CAD) and a Letter of Credit (L/C) strongly depends on the specific circumstances of the trade transaction. An L/C offers more security but is more complex and expensive. CAD, on the other hand, is simpler and faster but carries more risks for the exporter. It is essential to carefully weigh the risks and benefits and choose the payment method that best suits the needs of both parties.

Contact with L/C specialist Elceco

Do you need help making this assessment or do you want to know more about the different possibilities? Please feel free to contact us. You can do so by email or telephone; we are happy to discuss it further with you!