ADVANCE AGAINST DOCUMENTS Meaning and
Definition
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Advance Against Documents refers to a financial arrangement in international trade where a bank provides a loan or credit facility to a buyer, using the buyer’s import documents as collateral. Under this method, the seller ships the goods to the buyer and then presents the shipping documents, such as bill of lading, invoices, and insurance papers, to the bank. The bank, upon verification of the documents, provides a loan or advance to the buyer against the value of the goods.
In this type of transaction, the bank takes the ownership of the shipping documents until the buyer repays the loan amount. The advance amount is typically based on a certain percentage of the invoiced value of the goods. Once the buyer receives the documents, they can take possession of the goods and continue with the clearance process. The buyer is usually required to repay the loan within a specified timeframe, which is usually tied to the sales proceeds generated from the goods.
Advance Against Documents offers several benefits to both buyers and sellers in international trade. For buyers, it provides a means to finance their purchases without the need for immediate payment, allowing for better cash flow management. For sellers, it helps to mitigate the risk of non-payment as the bank’s involvement ensures a certain level of security. This type of arrangement is often used when both parties have a longstanding relationship and trust each other's financial capabilities.
