The differences between a deferred payment L/C and a CAD D/A

We previously wrote an article about the differences between Cash Against Documents (CAD) and a Letter of Credit (L/C). In the current turbulent geopolitical economic situation, we tend to say that an L/C is the safest choice in many situations. However, when the buyer and seller have known each other for a longer time (and well) and the order amounts are not exorbitantly high, we can also well imagine the choice for CAD.

The choice between CAD and an L/C also 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 entails 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. You also look forward to that repeat order, right?

To delve deeper into the matter of the variants, in this article we highlight the differences between an L/C with deferred payment and CAD D/A.

CAD D/A stands for Cash Against Documents, Documents Against Acceptance. Both an L/C with deferred payment and CAD D/A provide for payment at a later time, but there are important differences in security and structure.

L/C with Deferred Payment

With an L/C with deferred payment, you have payment security because the bank guarantees payment after (in most cases) the agreed number of days after the shipping date, following their approval of the documents. It is therefore essential to present a correct set of documents that complies with the terms of the L/C. If this is not the case, the bank can refuse payment. The advantage for the exporter is certainty of payment, provided the documents are correct.

Cash Against Documents, Documents Against Acceptance (CAD – D/A)

With Cash Against Documents, Documents Against Acceptance (CAD – D/A), you do not have payment security from the bank and are dependent on the buyer in this regard. They pay after the agreed number of days, after acceptance of the draft (bill of exchange). The documents do go through banking channels, but the bank does not check the documents; they essentially pass them on to the buyer who receives the documents after signing the draft. This is precisely where the risk lies, because if the buyer does not pay, you obviously run the risk of non-payment. Whereas an L/C with deferred payment primarily provides security for the exporter, this is mainly a convenient construction for the importer, because they have lower costs and no funds are blocked in their account.

Conclusion

The choice between an L/C (Letter of Credit) with deferred payment and CAD D/A strongly depends on the specific circumstances of the trade transaction. The L/C with deferred payment offers more security but is more complex and expensive. CAD, on the other hand, is simpler and faster but entails 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 L/C specialist Elceco

Do you need help making this consideration, or would you like to know more about the different possibilities? Please feel free to contact us. You can do so by e-mail or telephone; we are happy to discuss it further!