What is the difference between Cash against Documents and Letter Of Credit?

Answer 1

In the case of foreign trade, payment is always done through banks. The supplier assigns a bank and the customer assigns a bank. The deal happens between these two banks only.

Cash Against Document (CAD): The supplier produces the documentation through its bank to the clients bank, then the client's bank hand overs the documents to its client against receiving payment. After that, the client's bank transfers the money to supplier's bank.

Letter of Credit (LC): The supplier produces the documentation through its bank to the client's bank. The client's bank directly pays against the document's submission, so the risk is on client's bank. Hence, the trust worthiness factor increases, as the client's bank guarantees the payment against documentation.

It is always preferable when both parties lack trust and want more security.

The basic difference is in CAD the client pays the money to its bank and the bank sends it to the supplier's bank. With LC, the client's bank pays the money without failing against documentation, so in LC the supplier is more assured of getting the money.