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Documents against payment help to define a specific transaction of goods. They are often used in importing/exporting scenarios. The documents serve as a security for an agreement between a buyer and a seller.
The items known as documents against payment, or D/P, are one form of commercial safeguard that often relies on a bill of exchange document. The bill of exchange sets up parameters for the use of D/P and the overall sale. The bill of exchange typically includes three parties. The first is the drawer, the party sending the goods. The second party is the drawee, or buyer, and the third is the payee, in many cases, the bank acting on behalf of the seller.
In a D/P scenario, the bank will hold the ownership documents for the goods until they are paid for. This arrangement provides extra security for the seller, with the bank acting as an effective middleman for the trade. The buyer will often utilize a “bank draft,” or similar payment method, where the payment is guaranteed to be drawn against existing funds.
Despite the design of the documents against payment process, experts reveal that the seller still has some significant risks. One is that the buyer could receive goods before the process is complete. Another very common risk of a D/P setup is that if the buyer refuses to pay, the physical goods are still stuck in the destination country, with the seller paying the tab for shipping them back to where they came from. A failed D/P transaction might leave the seller scrambling to offload or sell the assets at their destination, where getting a fair market price could be difficult.
Regardless of the risks involved, D/P still offer a way for sellers to hedge against nonpayment, in the sense that the buyer typically will not be able to take control of the goods without paying. This process is similar to any “document in lieu of payment” situation that may be the norm in other kinds of transactions, and in different fields where trusted commerce is a necessity. For example, a vehicle transaction process can be a similar situation, where actual ownership has much less to do with physical control of the vehicle than with the name that is recorded on the vehicle title by the Department of Motor Vehicles. The private used car sale, where the car title is a kind of “document against payment,” benefits from the additional paperwork in some of the same ways that an exporting agreement benefits from documents against payment.
What is happening if the consignee bank has given physical control of the goods to the buyer, but has not collected the amount, and will not pay pay the exporter bank? How much time will the seller wait? Is this a matter for a lawyer? Is this seller a risk or is my bank at risk?
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