Documents Against Payment (D/P) is a widely used international trade payment arrangement. Although D/P addresses some payment concerns, it still carries risks. This article introduces the process.
1. Definition
Documents Against Payment means that the buyer receives the collection documents only after paying the amount due. The arrangement often includes a bill of exchange issued by the seller requesting payment from the buyer.
The parties may agree an advance payment or deposit before documents are released, particularly where they do not have an established relationship. Such an arrangement can offer the seller some protection if the buyer later refuses the goods.
2. Parties involved
A D/P collection involves the following parties:
- Seller or exporter: The seller exports the goods and prepares the documents for collection through the banking channel.
The document set may include:
- Sales contract
- Commercial invoice
- Packing list
- Bill of lading
- Other relevant documents, such as a certificate of origin or quarantine certificate, depending on the product
- Buyer or importer: The buyer pays to receive the documents and uses them to take delivery of the shipment.
- Seller's bank: The remitting bank forwards the collection documents to the buyer's bank with payment instructions. The source also refers to an export certificate at this stage, which requires clarification.
- Buyer's bank: The collecting or presenting bank receives the documents and handles the buyer's payment and document release according to the collection instructions.
All parties must follow the applicable trade and payment rules and the agreed collection arrangements.
Read more: International Payments by Letter of Credit
3. Payment process
- Step 1: The seller and buyer sign a sales contract specifying D/P as the payment method.
- Step 2: The exporter contacts its bank and establishes the account arrangements.
- Step 3: The seller ships the goods and prepares export documents, including the invoice, certificates, and transport document.
- Step 3: The seller submits the transaction documents to its bank and requests forwarding to the buyer's bank.
- Step 4: The seller's bank handles the documents and forwards them to the buyer's bank.
- Step 5: The buyer's bank receives the documents and notifies the buyer.
- Step 6: The buyer's bank handles payment to the seller under the agreed collection terms.
- Step 7: The buyer's bank notifies the buyer of the payment and releases the documents in accordance with the collection instructions.
- Step 8: The seller is notified and receives the agreed funds.
The D/P collection process must comply with the applicable trade and payment framework and the parties' instructions.
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4. Risks of D/P
D/P gives the seller control over document release until payment, but it is not a guarantee of payment. For buyers, paying before examining the actual goods can be a disadvantage.
Risks can affect both parties. The source cites the case involving 100 containers of Vietnamese cashews exported to Italy in early 2022 under D/P arrangements. Original documents reportedly went missing after being couriered to the Italian banking side. The article states that prompt action by the exporters, the Ministry of Industry and Trade, and other authorities helped return control of the containers to the Vietnamese businesses.
Every payment method carries risks. Verify your trading partner's identity and information, understand the applicable rules, and establish clear procedures to reduce potential losses.