Document Against Payment (DP) – Sight Documents
Document against payment (DP) in export, happens when the importer/buyer needs to pay the amount due at sight. These types of payments are made before the documents are released by the importer’s bank. It is also known as sight documents.
The DP transaction utilizes a sight draft, where payment is on demand.
After the goods are imported, the exporter directs the sight draft to the clearing bank, along with documents necessary for the importer/buyer to obtain the goods from customs. The buyer has to settle the payment with the bank before the documents are released and he can take delivery of the goods. If the buyer fails or refuses to pay, the exporter has the right to recover the goods and resell them.
In general situations, sellers of goods or services want to get paid as soon as possible, even before the trade, and buyers want to delay payment for as long as possible, to maintain strong cash flow and provide the buyer time to sell on to their end customers. This means that third parties can add value by offering some form of financial guarantee, bridging the finance gap, and ensuring trust between the buyer and the seller.
Much trade is done cross-border, which can increase the risks involved when importing or exporting goods.
Exporting goods to another country or domestically to a new buyer is inherently risky. Therefore a growing company will want to mitigate some of these risks and also structure their finance in such a way as to allow sustainable growth.
Provides confidence both to seller and buyer – It gives assurance both to the seller and buyer. This always helps the buyers to get all goods without any payment. He has to make the payment only when the seller will ship the goods. Besides, this guarantee also assures the payment of the draft account at the site.
However, in practice, there are risks involved:
- The buyer can refuse to honor payment on any grounds.
- When the goods are shipped long distances, say from Thailand to the United States, it is usually impractical and too expensive for the seller to pay for return transportation. Thus, the seller is forced to sell the goods in the original country of destination at what is usually a heavy discount.
- Unlike letters of credit, the exporter’s bank does not assume liability to pay if the importer dishonors the Bill of Exchange
- In cases of shipments by air freight, the buyer may receive the goods before going to the bank and paying for them.