What is Cash Against Documents (CAD) Financing?

Is CAD Financing a Cheaper Way to Finance Imported Goods?

Controlling Ownership Documents Drive CAD Funding Business Transactions

Cash Against Documents (CAD) Funding

CAD, also known as Documents Against Payment, is a cost-effective alternative to a letter of credit in international trade transactions, allowing for improved net cash flow. Cash Against Documents (CAD) financing is a method for companies that import products to obtain goods prior to receipt.

To learn more about trade financing, visit our previous article, What is Bankers Trade Financing where you can learn more about cash against documents funding.

The process for Cash Against Document financing is like real estate transactions, where a third party holds funds in escrow until the transfer of the title finishes. Additionally, this intermediary relationship ensures the agent accepts the goods from the seller and retains them until the goods are quality-checked and then paid. The transfer of the title documents is a critical final step in the documentary credit processes.

Bankers Factoring acts as the import financing intermediary, and we supply the funds through purchase order financing and invoice factoring.

Documents Against Purchase is a robust solution for international businesses to facilitate smooth vendor relations. Accordingly, 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 Financing Process?

Documents Against Purchase or Cash Against Documents begins with the exporter or seller once the international buyer accepts the purchase order. Next, the seller prepares the required shipping documents, such as the Bill of Ladings per country of origin and country of destination requirements. Following the Export Collection Form, Bill of Exchange, and forwards the documents from the freight companies to the financial institution that the exporter uses.

In cash against documents, once the documents are sent, the merchandise is held with release restrictions from the importer. The release will happen upon payment 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 goods before transferring the funds to the financial institution. Cash Against Documents financing protects buyers from accepting goods of less 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 cash against documents or 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 that exporters get their money on time while the importer is not out the cash for the goods.

Below are some benefits of CAD Financing with Bankers:

• Sellers/Exporters can guarantee 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 (LOC) versus cash against documents/CAD Funding are:

1. A US-based importer must put up the cash, or
2. Be very bankable
3. A LOC can be expensive with a high service fee
4. A LOC is a rigid financing option
5. A bank guarantee is hard to qualify for and is not cost-effective

Visit our previous article about offering credit terms to learn more about payment terms.

What are the cash against documents terms?

Cash Against Documents terms are known to all parties to execute a successful transaction. The exporting party will send the shipping documents once the buyer places the purchase order. The Bankers Factoring forward these documents 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. The original bill of lading versus a copy is the key to controlling title to the finished goods.

Who pays for a cash against documents/CAD funded 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 protection for both sides of the deal, making the small fee to Bankers Factoring a solution that benefits all parties.

For domestic transactions, a letter of comfort or a letter of financial capability might work better and is much less costly.

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 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, since they did not release the original bill of lading under the CAD process.

List of risks associated with CAD transactions:

• No guarantees buyer will take possession of the goods
• The financial institution may release documents early
• Payment terms can be extended
• Payment is final
• High shipping costs for rejected goods

What to look for in a CAD transaction funding company

Some banks offer CAD or documents against acceptance financing, but their credit policies are much more stringent than Bankers Factoring. At Bankers Factoring, we provide quality & driven accounts receivable. International trade transactions are complex, requiring an expert to facilitate this transaction. Many banks lack 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 a business 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 or PO financing company that understands the unique needs of importers. With 25 years of best practices, we act as both your escrow agent and third-party agent for payment security plus a working capital solution.

As a business owner, Bankers wants to be both your purchase order finance company and your award-winning non-recourse factor company of choice.

Ready for the owner-employees of Bankers Factoring to fund purchase orders for your importing company via cash against documents? Call 866-598-4295 or go to Bankers-Factoring-Application.

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