The D/P transaction utilizes a sight draft.
Payment is on demand. After the goods are shipped, the exporter sends
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. On the surface, D/P transactions seem fairly safe from the
seller’s perspective. 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 Hong Kong to the United
States, it is usually impractical and too expensive for the seller to
ship them back home. Thus, the seller is forced to sell the goods in the
original country of destination at what is usually a heavy discount.
In cases of shipments by air freight, it is possible that the buyer will actually receive the goods before going to the bank and paying for them.
