In the high-stakes world of global metals and mining, the physical journey of commodities from mine to destination is only half the story. Running parallel is a critical financial journey governed by payment terms. These terms are more than just a timeline for payment; they are a fundamental risk management tool that defines how and when funds are transferred, and crucially, which party bears the financial risk at each stage of the transaction.
Understanding these terms is essential for negotiating deals that protect your capital, manage cash flow, and build trusting relationships with your trading partners. Here’s a breakdown of the most common payment methods used in the industry.
1. Cash in Advance (or Prepayment)
This is the most straightforward payment term. The buyer pays for the goods—either in full or as a significant partial payment—before the seller ships them.
How it Works: The buyer wires the agreed-upon funds to the seller. Only after confirming receipt of the payment does the seller initiate the shipment process.
Risk Analysis: The risk lies almost entirely with the buyer. They face the potential for non-delivery, delayed shipment, or receiving goods that don't meet the contract specifications after having already paid. This term is typically used when the seller has a strong negotiating position or when there is a lack of trust in the buyer's creditworthiness.
2. Cash Against Copy of Documents (CACD)
A common method used in sea freight transactions, often under CIF (Cost, Insurance, and Freight) or CFR (Cost and Freight) Incoterms.
How it Works: After the goods are shipped, the seller emails copies of the key shipping documents (like the Bill of Lading, invoice, and inspection certificate) to the buyer. Upon receiving these copies, the buyer makes the payment. Once the seller receives the funds, they send the original, physical documents to the buyer.
Risk Analysis: This method is more balanced. The seller is protected because the buyer cannot claim the goods from customs without the original documents. The buyer's primary risk is paying and then not receiving the original documents, although this risk is relatively low in established trade relationships.
3. Cash Against Conditional Release
This method introduces a trusted, neutral third party—typically a warehouse or logistics provider—to act as a guarantor.
How it Works: The seller's material is stored in a third-party warehouse. The warehouse issues a "holding confirmation" to the buyer, verifying that the goods exist and are under their control. The buyer then pays the seller. Once the seller confirms payment has been received, both parties instruct the warehouse to release the goods to the buyer.
Risk Analysis: This is a highly secure method for both parties. The buyer is assured the goods exist before paying, and the seller is assured they will be paid before the goods are released.
4. Cash Against Unconditional Release
While the process sounds similar to the conditional method, a critical distinction removes the layer of security.
How it Works: The process is the same, but the warehouse offers no guarantee or holding confirmation to the buyer. It simply acts as a storage facility.
Risk Analysis: Without the warehouse's guarantee, the risk for the buyer is high, almost identical to a standard Prepayment. They are paying for goods based on the seller's word alone.
5. Cash Against Documents (CAD) / Documents Against Payment (D/P)
One of the most popular and balanced methods in global trade, this involves banks acting as intermediaries.
How it Works: After shipment, the seller submits the original shipping documents to their bank. The seller's bank then forwards the documents to the buyer's bank. The buyer's bank notifies the buyer that the documents have arrived. The buyer pays the agreed amount to their bank, which in turn releases the documents. The funds are then transferred from the buyer's bank to the seller's bank.
Risk Analysis: Considered one of the most reliable methods, with low risk for both counterparties. The banks ensure that the exchange is simultaneous—documents are only released upon payment, and payment is only sent once the process is initiated.
6. Letter of Credit (L/C)
A Letter of Credit is not just a payment method; it's a formal guarantee from a bank. It is one of the most secure instruments available in international trade.
How it Works: The buyer's bank issues an L/C, which is a formal commitment to pay the seller a specified amount, provided the seller presents a set of compliant shipping documents (e.g., Bill of Lading, commercial invoice, certificate of origin) within a specified timeframe. Even if the buyer is unable to pay, the bank is obligated to do so.
Risk Analysis: This is the most secure option for the seller, virtually eliminating the risk of non-payment. For the buyer, it ensures the seller must adhere strictly to the terms of the contract to get paid. However, this security comes at a cost, as banks charge significant fees for issuing and processing L/Cs.
7. Open Account
This method operates on the basis of trust and is common in long-term relationships.
How it Works: The seller ships the goods and delivers the documents directly to the buyer. The buyer agrees to pay within a specified period after receiving the goods (e.g., 30, 60, or 90 days).
Risk Analysis: The risk falls entirely on the seller, who is essentially extending credit to the buyer. The seller faces the risk of late payment or default with limited recourse. This method is typically reserved for high-trust, long-standing commercial partnerships.
Choosing the Right Term
There is no single "best" payment term. The optimal choice depends on several factors: the level of trust between parties, the financial standing of the buyer, prevailing market conditions, and each party’s negotiating leverage. By understanding the nuances of each option, you can negotiate agreements that protect your interests, manage your cash flow effectively, and build stronger, more resilient trading relationships in the global marketplace.