Cash against documents (CAD) is a kind of transaction typically used in international trade. The title for goods bought is released to the purchaser after he or she has paid the full amount in cash. In other words, the importer will only get the goods after paying for them in full. International trade refers to trade between nations – imports and exports.
Usually a financial institution (commission house) manages the actual transfer of the title documents after confirming the cash payment.
Exporters sometimes insist on a CAD arrangement. After receiving and accepting an order from an overseas customer, the exporter prepares the necessary export documents required by both the country of origin and the destination.
CAD arrangements are most commonly found in international trade deals.
Within the set of documents there is an Export Collection Form, which is forwarded to the exporter’s bank. Some exporters prepare a Bill of Exchange and include that with the other forms.
The exporter’s bank sends the relevant documents to the importer’s bank. These documents will only be forwarded to the importer (the purchaser) after full payment for the order is made. The transaction is only officially completed when the exporter’s bank receives the money.
CAD terms are typically used when the importing country’s government requires tax stamps affixed to drafts – by eliminating the draft, both the exporter and importer avoid stamp taxes.
While the advantage for the exporter is clear – guaranteed payment – for the importer there is an element of risk. The importer will not know whether the goods purchased are up to standard before parting with his or her money.
The importer cannot reclaim funds after payment, unless the seller agrees.
According to Cambridge Dictionaries Online, cash against documents is:
“A financial arrangement in which someone can only collect goods they have imported after paying for them at the bank and showing proof that they have paid.”