Payment documents help to define a specific goods transaction. They are often used in import/export scenarios. The documents serve as collateral for an agreement between buyer and seller.
A bank check is often used as a payment method in situations where documents are used against payment.
Items known as documents against payment, or D/P, are a form of trade protection that often relies on a bill of exchange document. The bill of exchange defines parameters for the use of D/P and the general sale. The bill of exchange normally includes three parts. The first is the drawer, the sender of the goods. The second party is the drawee, or buyer, and the third party is the beneficiary, in many cases, the bank acting on behalf of the seller.
Documents against payment are often used in import and export scenarios.
In a D/P scenario, the bank will retain 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 intermediary for the transaction. The buyer will often use a “bank check” or similar payment method, where payment will be secured against existing funds.
Despite the design of documents against the payment process, experts reveal that the seller still runs some significant risks. One is that the buyer can receive goods before the process is completed. Another very common risk of a D/P setup is that if the buyer refuses to pay, the physical goods will still be stuck in the destination country, with the seller footing the bill to ship them back to the place of origin. A failed D/P transaction can leave the seller struggling to offload or sell the assets at their destination, where getting a fair market price can be difficult.
Regardless of the risks involved, D/P still provides a way for sellers to protect themselves against non-payment, in the sense that the buyer will normally not be able to take control of the goods without paying. This process is similar to any “document versus payment” situation that may be the norm in other types of transactions and in different fields where reliable commerce is a necessity. For example, a vehicle transaction process could be a similar situation, where actual ownership has far less to do with the physical control of the vehicle than it does with the name that is registered on the vehicle title by the Department of Motor Vehicles. The private sale of used cars, where the car title is a kind of “document against payment”, benefits from the additional paperwork in some of the same ways that an export contract benefits from documents against payment.