A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of payment to the exporter’s bank (remitting bank), which sends documents to the importer’s bank (collecting or presenting bank), along with payment and document release instructions. Funds received from the importer are remitted to the exporter through the banks in exchange for those documents.
D/Cs involve using a bill of exchange (commonly known as a draft) that serves as a legal demand for the importer either to pay the face amount immediately or at sight (called “documents against payment” or “cash against documents”) or to sign a promise to pay the draft on a specified future date (called “documents against acceptance” or “cash against acceptance”).
The collection cover letter gives instructions that specify the documents required for the delivery of the goods to the importer. Although banks do act as facilitators for their clients under D/C transactions, D/Cs offer no verification process and limited recourse in the event of non-payment beyond return of the documents or the accepted draft. D/Cs are generally less expensive than letters of credit (LCs).
Characteristics of a Documentary Collection
Applicability: 8BRecommended for use in established trade relationships, in stable export markets and only for transactions involving ocean shipments where documents control delivery of the goods.
Risk: Riskier for the exporter, though D/C terms are more convenient and cheaper than an LC to the importer.
Pros: (1) Bank assistance in obtaining payment; (2) The process is simple, fast, and less costly than LCs.
Cons: (1) Banks’ role is limited, and they do not guarantee payment; (2) Not appropriate for air shipments or straight consigned ocean shipments.
Key Points
• Because D/Cs provide less security for exporters, they are less complicated and less expensive than LCs.
• Under a D/C transaction, the importer is not obligated to pay for goods before shipment.
• If structured properly, the exporter retains control over the goods until the importer either pays the draft amount at sight or accepts the draft and thereby incurs a legal obligation to pay at a specified later date.
• Under a D/C transaction, the goods can be controlled for ocean shipments, but they are more difficult to control for air and overland shipments.
• D/C transactions involving air and overland shipments allow the importer to receive the goods without payment or receiving any documents held by the exporter, unless the exporter employs agents in the importing country to take delivery until goods are paid for.
• The exporter’s bank and the importer’s bank play an essential role in D/Cs.
• Although the banks control the flow of documents, they neither verify the documents nor take any risks. They can, however, influence the mutually satisfactory settlement of a D/C transaction, given that refusal by the importer to pay will reflect on their reputation with their bank.
When to Use Documentary Collections
With D/Cs, the exporter has little recourse against the importer in case of non-payment. Thus, D/Cs should be used only under the following conditions:
• The exporter and importer have a well-established relationship.
• The exporter is confident that the importing country is politically and economically stable.
• An open account sale is considered too risky, and an LC is unacceptable to the importer.
• The importer is unable to take delivery of the goods without documents, such as an ocean bill of lading, controlled by the exporter.
Typical Simplified Documentary Collection Transaction Flow
1. The exporter ships the goods to the importer and receives the documents from the contracted shipper.
2. The exporter compiles and presents the documents to their bank with payment and document release instructions.
3. The exporter’s remitting bank sends the documents to the importer’s collecting or presenting bank.
4. The collecting bank releases the documents to the importer on receipt of payment or acceptance of the draft.
5. The importer uses the documents to obtain the goods and to clear them at customs.
6. Once the collecting bank receives payment, it forwards the proceeds to the remitting bank.
7. The remitting bank then credits the exporter’s account.
Two Types of Documentary Collections
There are two types of D/Cs. The first type is called “documents against payment” (D/P), an arrangement in which an importer receives the documents required to obtain the goods only against payment. The second type is called “documents against acceptance” (D/A), an arrangement in which an importer receives the documents required to obtain the goods by signing a promise to pay the draft on a specified future date.
Documents against Payment (D/P) Collection
With a D/P collection, the exporter ships the goods and then gives the documents to their bank, which will forward the documents to the importer’s bank, along with instructions on how to collect the money from the importer. In this arrangement, the importer’s bank releases the documents to the importer only upon payment for the goods. Once payment is received, the importer’s bank transmits the funds to the exporter’s bank for payment to the exporter. Below is an overview summary of a D/P collection:
• Time of Payment: After shipment, but before documents are released.
• Transfer of Goods: After payment is made at sight.
• Exporter Risk: If the draft is unpaid, arrangements may need to be made to have the goods disposed of or returned or delivered to someone else in the importer’s country.
Documents against Acceptance (D/A) Collection
With a D/A collection, the exporter extends credit to the importer by using a time draft. The documents are released to the importer to claim the goods upon their signed acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a specific date. At maturity, the importer’s bank contacts the importer for payment. Upon receipt of payment, the importer’s bank transmits the funds to the exporter’s bank for payment to the exporter. Below is an overview summary of a D/A collection:
• Time of Payment: On maturity of draft at a specified future date.
• Transfer of Goods: Before payment, but upon acceptance of draft.
• Exporter Risk: No control over goods after acceptance and payment is not assured at due date. If the draft is not accepted to begin with, arrangements may need to be made to have the goods disposed of or returned or delivered to someone else in the importer’s country.
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