Choosing a payment method in trade is a balance between risk and cost. At one end is open account (easiest for the buyer, riskiest for the exporter), at the other is advance payment (the opposite). Documentary collection and the letter of credit sit between these extremes. This guide explains documentary collection, the D/P versus D/A distinction, and where it stands relative to an L/C.
Documentary collection (CAD): the exporter sends shipping documents through banks, and the buyer obtains them only by paying (D/P) or accepting a draft (D/A). The bank forwards documents but does not undertake payment. The rule is ICC URC 522.
How it works
The parties: the exporter (principal/seller), the exporter's bank (remitting bank), the buyer's bank (collecting bank), and the buyer. The exporter ships the goods and hands documents (invoice, B/L, packing list, and a draft if used) to its bank; the documents reach the collecting bank; the buyer obtains them on payment or acceptance and releases the goods. The banks do not take on payment risk; they execute the collection instruction only.
D/P versus D/A
- D/P (documents against payment): documents are released only against immediate payment. Safer for the exporter.
- D/A (documents against acceptance): documents are released against acceptance of a time draft. It grants the buyer a term, but non-payment at maturity is the exporter's risk.
Payment methods, the risk-cost balance
The table below orders the four basic payment methods by exporter risk and bank assurance.
| Method | Exporter risk | Bank assurance | Cost / note |
|---|---|---|---|
| Advance payment | Lowest for the exporter | Not required | Hardest for the buyer, cash pressure |
| Letter of Credit (L/C) | Low | High (bank payment undertaking) | High cost, document-heavy |
| Documentary collection (CAD) | Medium | Medium (checks documents, does not guarantee payment) | Reasonable cost, balanced |
| Open account | Highest for the exporter | None | Cheapest and fastest, favors the buyer |
Pick the method by trust level and deal size. For a new or risky buyer, an L/C; for a known buyer, documentary collection; for a long-term trusted buyer, open account usually makes sense.
Risks for the exporter
In documentary collection the bank gives no payment guarantee. The buyer may walk away from the documents after the goods reach the port, leaving the goods abroad with re-import or new-buyer costs. In D/A, a draft may be accepted but not paid at maturity. With new buyers, assess the risk before using this method on its own.
Tracking the payment method and documents
Each order's payment method, term, and document status should be clearly tracked. In a trade operations layer like Sighthem, the payment method is tied to the order and ledger; documents (B/L, invoice, packing list) are attached to the shipment by version; collection and maturity are visible in the ledger. So which order is on which method, at which stage, stays on one screen.
Frequently asked questions
What is documentary collection (CAD)?
Documentary collection (cash against documents, CAD) is a payment method where the exporter sends shipping documents to the buyer through banks, and the buyer can obtain the documents only by paying or by accepting a bill of exchange. The banks check and forward the documents; unlike a letter of credit, they do not undertake payment. The international rule is ICC URC 522.
What is the difference between D/P and D/A?
D/P (documents against payment) means documents are released only against immediate payment; it is safer for the exporter. D/A (documents against acceptance) means documents are released against the buyer accepting a time draft; it grants the buyer a term but carries higher collection risk for the exporter.
How does documentary collection differ from a letter of credit?
In an L/C the bank undertakes payment if terms are met; that assurance is high, but so are cost and document burden. In documentary collection the bank only forwards documents and gives no payment guarantee; cost is lower and the process simpler, but the exporter carries more risk. The choice depends on trust between the parties and deal size.
How safe is documentary collection for the exporter?
Safer than open account, riskier than an L/C. The main risk is the buyer walking away from the documents (especially while goods sit at the port) or, in D/A, accepting the draft but not paying at maturity. For known, trusted buyers and reasonably sized deals, the cost-assurance balance is good.
When is documentary collection preferred?
When there is some trust between the parties but not as much as open account; when the cost and document burden of an L/C are excessive for the deal size; and when the exporter wants to keep control of the goods through the documents, documentary collection is a balanced middle ground.