Both collections leave the exporter without a bank undertaking. The difference is the buyer credit D/A grants, which runs from acceptance, not shipment, and the risk that comes with it.
Documents against payment is cheaper by roughly the cost of the credit that documents against acceptance grants. On an illustrative 4,200,000 export order, D/P costs the exporter 102,902 all in and D/A on 90 days 201,512: of the 98,610 gap, 71,883 is financing and 26,727 is extra expected loss. The fees are identical. To leave the same margin, D/A needs a price 2.37 per cent higher.
Worked in full in Trade Finance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The two are usually compared on fees, where they tie, or on risk in the abstract: D/P "keeps control of the goods", D/A "is open account with paperwork". Neither tells an exporter what to quote. Pricing both on the same order, from the first day of production to the day the money lands, does.
Harrowgate Instruments ships process instrumentation to Meridian Process Holdings, the order followed through the book. All figures are illustrative.
| Input | Value |
|---|---|
| Contract value / cost of goods sold | 4,200,000 / 3,423,000 |
| Operating margin before finance (7.3%) | 306,600 |
| Exporter's cost of funds, on the cost, actual/360 | 8.4% |
| Production / transit / shipment to presentation / collection cycle | 70 / 26 / 9 / 7 days |
| Buyer credit under D/A, from acceptance | 90 days |
| Collection fee / couriers and certificates | 0.09% / 1,180 |
| Buyer default probability, a year / loss given default | 4.1% / 62% |
| D/P: refusal as a multiple of default / loss on a forced sale | 1.45 / 29% |
| D/A: loss as a share of the open-account loss | 90% |
1. Days to cash. The exporter's money is out from the first day of production. D/P is paid at the end of the collection cycle; D/A adds the 90 days, which start only at acceptance.
D/P: 70 + 26 + 9 + 7 = 112 days
D/A: 112 + 90 = 202 days, and 106 days of credit measured from the bill of lading
2. Financing, on the cost, not the price.
Financing = cost of goods × cost of funds × days ÷ 360
D/P: 3,423,000 × 8.4% × 112 ÷ 360 = 89,454
D/A: 3,423,000 × 8.4% × 202 ÷ 360 = 161,337
Excel: =COGS*CoF*Days/360
3. Fees. 0.09 per cent of 4,200,000 is 3,780, well above the 260 minimum, plus 1,180 of documents: 4,960 on both routes. The banks are postmen under URC 522; neither undertakes to pay.
4. Expected loss. The exposure runs from dispatch, when the goods leave the factory, to the day of payment: 42 days under D/P, 132 under D/A. Convert the annual default probability to each period on a 365-day basis.
D/P: default over 42 days = 1 − (1 − 4.1%)42/365 = 0.48%; refusal = 0.48% × 1.45 = 0.70%; loss 4,200,000 × 0.70% × 29% = 8,487
D/A: default over 132 days = 1.50%; loss 4,200,000 × 1.50% × 62% × 90% = 35,215
D/P is not riskless. A buyer can refuse to take up the documents more easily than it can default, and the exporter is left with goods at a foreign port to resell or ship home. The loss per event is smaller, 29 per cent, because the goods are still the exporter's.
| Line | D/P | D/A, 90 days | Difference |
|---|---|---|---|
| Financing | 89,454 | 161,337 | 71,883 |
| Fees | 4,960 | 4,960 | 0 |
| Expected loss | 8,487 | 35,215 | 26,727 |
| Total cost | 102,902 | 201,512 | 98,610 |
| Share of the operating margin | 33.6% | 65.7% | |
| Margin after finance | 203,698 | 105,088 |
Granting D/A leaves 51.6 per cent of the D/P margin. Nearly three quarters of the gap, 72.9 per cent, is simply the cost of financing 90 more days of production cost; the rest is the risk of an unsecured claim on the buyer. Each day of credit costs about 1,096.
The price that makes D/A neutral is not 98,610 divided by the price. Raising the price raises the collection fee and the amount at risk, 0.9284 per cent of every extra unit, so the premium is (203,698 − 306,600 + 162,517 + 0.9284% × 4,200,000) ÷ (4,200,000 × (1 − 0.9284%)) = 2.37 per cent, 99,535.
| Buyer default probability | D/P | D/A | Gap | D/A margin after finance |
|---|---|---|---|---|
| 1.0% | 96,456 | 174,800 | 78,344 | 131,800 |
| 2.0% | 98,515 | 183,358 | 84,842 | 123,242 |
| 4.1% (base) | 102,902 | 201,512 | 98,610 | 105,088 |
| 8.0% | 111,278 | 235,912 | 124,634 | 70,688 |
| 15.0% | 127,135 | 300,070 | 172,935 | 6,530 |
Even with a 1 per cent buyer the gap is 78,344: the financing alone separates the two. The model's weakest assumption is that a D/P buyer pays as soon as the documents are presented. Many pay only when the cargo arrives. If that adds 14 days, D/P costs 116,904; at 30 days, 132,900, and the gap narrows to 68,612.
Comparing the two on bank charges and calling them equal, or reading "90 days" as 90 days. Under D/A the term starts at acceptance, after transit, presentation and the collection cycle, so the exporter carries 106 days of credit from the bill of lading, and 202 days of financing from the start of production. Quoting D/A at the D/P price on a 7.3 per cent margin order hands the buyer 98,610, almost a third of the operating margin.
A buyer that asks for D/A is asking for credit. Price it as credit, or compare it with open account and a letter of credit on the same basis, as in letter of credit vs documentary collection.
Both collections, with every input live, are in the free workbook for this case.
Under documents against payment the collecting bank releases the shipping documents only when the buyer pays; under documents against acceptance it releases them when the buyer accepts a draft payable later. On the illustrative order D/P pays the exporter on day 112 from the start of production and D/A on 90-day terms on day 202, because the term runs from acceptance.
No. The buyer can refuse to take up the documents, leaving the goods at a foreign port in the exporter's name. With a 4.1 per cent annual default probability, a refusal multiple of 1.45 and a 29 per cent loss on a forced sale, D/P carries 8,487 of expected loss on a 4,200,000 order, against 35,215 under D/A.
Enough to restore the D/P margin after the extra financing and risk, net of the fees and loss that rise with the price. On the illustrative order that is 2.37 per cent, 99,535, against a cost gap of 98,610, because part of any premium is lost to the larger fee and the larger amount at risk.
This article is one calculation from Trade Finance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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