Feature	Letter of Credit (LC)	Cash-against-Documents (CAD / D/P)
Core idea	Buyer’s bank promises to pay the seller once a pre-agreed document set exactly matches LC terms.	Seller ships and mails the negotiable B/L to their bank; buyer can claim documents (and thus the cargo) only after paying the draft.
Risk carried by	Bank (for buyer’s solvency) once documents are compliant; seller for documentary discrepancies.	Seller carries buyer default risk until payment; buyer can inspect docs before paying.
Working-capital impact	Money arrives on presentation (sight LC) or at tenor (usance LC). Discounting possible.	Funds released when ship reaches destination & buyer pays—typical 7-30 days longer cash gap for seller.
Cost	0.5 – 1.5 % of face value (opening, confirmation, negotiation, discrepancies).	0.1 – 0.4 % (collection handling fee) + courier.
Typical use cases	New counter-party; large cargo (≥ USD 0.5 M); politically risky buyer country; bank-financed deal.	Repeat counter-party; modest cargo; buyer has strong credit but wants to avoid LC costs.
Key documents	Commercial invoice, clean on-board B/L, packing list, COO, insurance (if CIF/CIP), inspection/COA.	Similar set but bank only checks for completeness, not wording compliance.
Common pitfalls	Tiny doc errors → bank refusal; shipment must stay within LC validity; extra drafts needed for ±10 % quantity.	Buyer delays payment to leverage demurrage; if buyer disappears, seller must reroute or liquidate cargo elsewhere.
Variations	– Sight vs Usance - Confirmed LC (2nd bank guarantee) - Transferable / Back-to-Back - Standby LC	– Documents against Acceptance (D/A): buyer accepts a time draft instead of paying sight.

---

1  Speed & cash-flow timeline

LC (Sight)          CAD (D/P)

Contract signed     Contract signed
↓                   ↓
LC issued & advised Ship
Ship                ↓
↓                   Docs to remitting bank
Docs → bank         ↓
Bank pays seller    Buyer pays, gets docs
Cargo arrives       ↓
Buyer clears cargo  Buyer clears cargo

For seller, LC funds arrive 1–2 weeks earlier than CAD.

---

2  When to insist on an LC

• First shipment with a new buyer or into sanction-prone / high-FX-control country.

• Cargo value above your credit-insurance single-risk limit.

• Long transit (> 30 days) where buyer could become insolvent before cargo lands.

• Financing your purchase with a bank—lenders normally require an LC or SBLC.

---

3  When CAD is perfectly fine

• Stable relationship (≥ 3 cargoes) and buyer provides audited financials.

• Regional trade in GCC/EU where legal enforcement is predictable.

• Low-value containers or samples.

• Seller keen to stay price-competitive: cutting the LC fee can shave 1.5-0.5 % off landed cost.

---

4  Hybrid solutions

• LC for first two lots, switch to CAD once performance proven.

• Standby LC: cheaper than a documentary LC; only drawn if buyer defaults on CAD payment.

• Insurance + CAD: seller buys trade-credit insurance (≈ 0.3 – 0.6 %) to hedge buyer default, still cheaper than a confirmed LC.

---

5  Negotiation tips

• Seller: request sight LC but offer a 1 % price discount for CAD—makes cost trade-off explicit.

• Buyer: agree to LC but cap discrep­ancy fees on first cargo; push to convert to CAD after on-time payment history.

• Both: align Incoterm & risk; if using CIF, seller’s LC presentation must include insurance certificate.

• Write a clear discrepancy cure clause (“bank may cable correct docs, fee USD 50 borne by seller”) to avoid full rejection over minor typos.

---

Cheat-sheet takeaway

If you want…	Use
Maximum payment certainty	Sight, confirmed LC
Middle ground / low cost but safety net	CAD + standby LC
Cheapest, fastest processing with trusted partner	Straight CAD (D/P)

Pick the instrument that matches cargo value, counter-party risk, and financing cost—and put the choice into your master offtake template so every shipment starts on the right footing.