Payment against documents

Payment against documents
See also

Payment against documents is method of payment that is dependent on documents established in contract of sale. The reason of that method is to decreases the risk and guarantee for customer that goods are shipped as in the contract, before they are actually paid for. Buyer may wait until goods will arrive and then may examine them. Payment is based on shipping documents, but final document are not handed over to customer until customer agreed to pay for goods. This kind of payment costs about 2% of sales volume value[1]. Payment on delivery is required even if price is not defined and might be only estimated [2]. Mechanism of payment against documents is very similar to issuing letter of credit[3].

When payment against documents is used[edit]

Method of payment against documents is used when the seller and the buyer [4]:

  • know each other,
  • have long-term business relationship,
  • are reliable partners,
  • are prepared to take some risks,
  • want to avoid higher bank fees (charged for letter of credit),
  • are ready to check every time documents very carefully and understand matters in documentation,
  • have no doubts that each party wants to fulfil the contract.

Documents used for payment against documents[edit]

Documents used for payment against documents is draft of payment. Draft of payment is an order wrote by seller and requests the buyer to pay specific amount of money within defined time. There a three specified types of drafts which are negotiable within the contract[5]:

  1. Sight draft - payment has to be done immediately,
  2. Time draft - payment has to be within defined time (30, 60, 90, 120 or 180 days),
  3. Deferred payment - payment has to be done by specific date defined in the contract,

Forms of payment against documents[edit]

There are two most frequently used forms of payment against documents[6]:

  1. Documents against payment (D/P) - based on sight draft,
  2. Documents against acceptance (D/A) - based on time draft

Footnotes[edit]

  1. Mühlbacher H., Leihs H., Dahringer L., (2006), p. 681 - 682
  2. Brand R., (2000), p. 47
  3. Evans D. A. , (1995), p. 417
  4. Mühlbacher H., Leihs H., Dahringer L., (2006), p. 681 - 682; Malbon J., Bishop B., (2014), p. 118
  5. Mühlbacher H., Leihs H., Dahringer L., (2006), p. 681 - 682
  6. Mühlbacher H., Leihs H., Dahringer L., (2006), p. 681 - 682

References[edit]

Author: Dominika Kaczmarczyk