How to Use “Documents Against Payment” And “Documents Against Acceptance” And How Does The Supplier Get Paid

The best and safest method is always the "Letter of Credit". The supplier may have accepted alternative payment methods, such as "Documents Against Payment". The supplier may have accepted "Documents Against Acceptance"? So what is "D/P" and "D/A"?

What about sale on D/A?
Then there is the "Documents Against Acceptance" or "D/A", which is risky. The major advantage for the buyer in using "D/A" is the low cost, versus using "L/C". However, the supplier runs a great risk. Should the buyer reject the documents for whatever reason, the seller is not protected. As the goods shipped would be loaded on the ship, and in transit, the seller has little recourse against the buyer for non-payment. Here again, by buying export credit insurance, the seller is protected against bad debts risks. The seller runs the highest risk when selling on "D/A". "D/A" is available in terms, such as "D/A 30 days Sight", "D/A 60 days Sight".

So, is sale on D/P safe?
The seller might ask, so that is fine. Well, not really. Sales on "D/P" terms offer no protection to the seller. In case the buyer cancels the order when the goods are in production, or, in case the buyer refuses to accept the documents when presented by the bank, the seller is in a fix. By this time, the goods are in production for this buyer, or, the goods have been shipped and will be soon arriving at the port. If this matter is not resolved, the seller will be incurring storage costs. So what can the seller do? There is a solution, and that is to safeguard against such "non-payment" risks. The seller can buy export credit insurance, which insures against unforeseeable political, social and commercial factors that prevent the buyer from paying the seller. By buying export credit insurance, the seller is protected against bad debts risks, enabling to extend more favorable terms to the buyers. By having export credit insurance, the seller is able to get enhanced trade finance. "D/P" is always on basis of "D/P at Sight".

How does D/P work?
For sales on "D/P", the supplier effects the shipment and sends the shipping documents to the bank for collection. The supplier's bank sends the shipping documents along with the collection letter to the buyer's (importer) bank, which in turn sends a collection notice to the buyer. The buyer makes payment upon receipt of the notice. Only after payment is made can the buyer receive the shipping documents and take possession of the goods.

Difficulty: Moderate