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.
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