Definition
Documents Against Acceptance (D/A) is a payment term used in international trade agreements. It means that the exporter will entrust the legal documents needed to obtain the shipped goods to their bank, which will then send them to the buyer’s bank. The buyer will be able to collect these documents (and thus, the goods) only when they accept a draft, which is a written order that binds them to pay the agreed sum at a specified date.
Key Takeaways
- Documents Against Acceptance (D/A) refers to a trade financing arrangement where an exporter extends credit to the importer. This allows the importer to pay for the goods or services on a future specified date, rather than at the time of trade.
- In a D/A transaction, the necessary shipping and title transfer documents are held by a bank. The bank will only release these documents to the importer upon acceptance of a time draft, which stipulates the due date for payment.
- The major risk involved in D/A terms is that the importer can have the goods before payment is made, giving the importer leverage over the exporter. For this reason, the D/A terms are often used amongst established trading partners who trust each other.
Importance
Documents Against Acceptance (D/A) is a crucial term in international trade finance due to its role in facilitating transactions and mitigating risk.
It refers to a condition where the export consignment’s documents, necessary for a buyer to clear the goods from customs and take possession, are not released by the seller’s bank until the buyer has accepted, in the form of a draft agreement, to pay the seller by an agreed future date.
This arrangement ensures that the buyer can verify the terms and quality of goods before making payment, while the seller retains control over the goods until a commitment to pay is received.
Therefore, D/A provides a balance of assurance for both parties in the transaction, which is particularly significant when dealing across borders with potentially unknown parties.
Explanation
Documents Against Acceptance (D/A) serves as a crucial element in international trade, specifically dealing with the payment of goods or services. It is a form of a trade finance instrument that provides a secure yet flexible mechanism to sellers (exporters) and buyers (importers) in such transactions.
The method is designed to protect the interest of both parties. For the sellers, it assures that they will retain ownership of goods until the buyer formally acknowledges (accepts) ownership, while it allows buyers to delay payment until they’ve had an opportunity to inspect the goods received.
Under the terms of Documents Against Acceptance, the exporter consigns goods to the shipping agent but importantly, the shipping documents and ownership title of these goods i.e., the Bill of Lading, are released to the buyer only when the buyer signs a time draft, promising to make payment at an agreed future point in time. This method hence gives the buyer time to resell the goods before payment is due.
In this way, Documents Against acceptance act as a safety measure, mitigating the risk of non-payment for the seller and risk of non-receipt of goods for the buyer.
Examples of Documents Against Acceptance
Documents Against Acceptance, also known as D/A, is a payment term in international trade where the exporter extends credit to the importer. The method entails that the documents related to the shipment are submitted to the bank and the bank will only release the documents to the importer once they accept a draft, thereby committing to make payment at a later, specified date.Real-world examples of the use of D/A:
International Goods Export: A company in China exports electronic components to a retailer in the U.S. The Chinese company sends the shipment documents to the bank with a D/A payment term, whereby the U.S. retailer has to accept the draft confirming its agreement to pay on a future date before it can receive the documentation necessary to claim the goods.
Agriculture Commodity Trading: A farmer in Brazil exports a shipment of soybeans to a food processing company in Europe. The shipment documents are submitted with a D/A payment term, meaning the European company has to accept the agreed payment terms and thereby promising to pay at a agreed future date before it can take delivery of the soybeans.
Machinery Export: A manufacturer in Germany exports heavy machinery to a construction company in India. In this scenario, D/A would allow the Indian company to receive the machinery and begin using it to generate revenue before having to pay the German manufacturer. The payment terms and agreement would be governed by the documents against acceptance strategy.
FAQs about Documents Against Acceptance
What is Documents Against Acceptance?
Documents Against Acceptance is a term in international trade, under which an exporter instructs their bank to hand over shipping and title documents to an importer only if the importer accepts the accompanying bill of exchange or draft by signing it.
What are the benefits of using Documents Against Acceptance?
One of the main benefits for the exporter is the promise of payment. Once the importer signs the bill of exchange, it is a promise that payment will be made, which adds an extra layer of security for the exporter. For the importer, it allows them to control the shipping documents before payment is made.
How does Documents Against Acceptance work?
The exporter consigns the goods to a carrier and obtains a Bill of Lading. The exporter passes this to their bank, alongside the Bill of Exchange. The banks send these documents to the importer’s bank, which will only release the documents to the importer once they have accepted the Bill of Exchange.
What risks are involved in using Documents Against Acceptance?
The importer could potentially default on their deferred payment, especially if the date is long after receiving the goods. This can pose a risk to the exporter. On the importer’s side, there can also be a risk of not receiving the exact goods specified or on time.
Related Entrepreneurship Terms
- Bill of Exchange: An unconditional order issued by a person or business which directs another person to pay a certain sum of money to a person named in the order.
- Letter of Credit: A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.
- Trade Finance: Financing for trade, it concerns both domestic and international trade transactions where a seller will require the payment of goods and services exported to a buyer in advance.
- Import & Export Documents: Documents required in international trade transactions, like Bill of Lading, Commercial Invoice, Insurance certificate etc., that serves as a contract, receipt and invoice between the buyer and the seller.
- Sight Draft: A type of bill of exchange, where the exporter holds the title to the transported goods until the importer receives and pays for them.
Sources for More Information
- Investopedia: This site offers a professional grade financial education platform. With comprehensive dictionary-style definitions alongside in-depth articles, it’s a great resource on the term “Documents Against Acceptance”.
- The Balance: A personal finance resource, The Balance delivers clear, practical, and straightforward advice to help you make your best financial decisions.
- Inc.: Offers insights, tips, and techniques about small business owners and entrepreneurs. Topics cover all aspects of business including finance.
- Economy Watch: This global online economics community offers readers a comprehensive view of world markets and economies. This source offers detailed articles on a wide range of economic and financial topics, including “Documents Against Acceptance”.
