Documentary collection refers to a payment collected by a bank at the exporter’s request against handover of shipping documents to the importer.
It is the collection of funds from an importer (buyer) by a bank, against the delivery of documents. The exporter’s bank presents documents to the importer through their bank and in exchange receives payment, or obtains acceptance of a bill of exchange for payment at a future date.
Documentary Collections offer the exporter a degree of security in the transaction as the Bank will have control over the goods through the title documents. However, the banks have no payment obligations in documentary collections. Banks are also not responsible for the authenticity or correctness of the documents or for the condition and quality of the goods.
Compared to open account, documentary collection offers greater security, but less than a letter of credit.
Documentary collections are very suitable in cases where the exporter is reluctant to supply the goods on an open account basis but does not need the degree of security provided by a documentary credit.
Types of Documentary Collections
1. Documents against Payment (D/P)
Documents against Payment is known as “Sight Draft” or “Cash against Documents” (CAD). The importer must pay before the collecting bank releases the title documents.
2. Documents against Acceptance (D/A)
The importer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the importer.
When to use Documentary Collections
Documentary collections would be appropriate where:
- The exporter and the importer know each other to be reliable.
- There is no doubt about the importer’s willingness or ability to pay.
- The political and economic conditions of the importer’s country are stable.
- The importer’s country does not have restrictive foreign exchange controls.
In short, Documentary Collections are not recommended for exports to nations that are politically or economically unstable.
However, because of their lower cost and simple process, Documentary Collections are best suited for established trade relationships, and for transactions involving ocean shipments rather than air or land shipments which are more difficult to control.
Advantages and disadvantages of Documentary Collection
- Easy and inexpensive method of payment, as compared to letters of credit.
- The shipping documents stay in the banking system and title to the goods remains with exporter until the payment or commitment to pay is made.
- A payment or commitment to pay is made only upon delivery of goods and receipt of the relevant documents.
- Handling of documents and making payments in accordance with international rules.
- Fast and secure method of receiving payment than open account.
- If the goods are addressed to the importer, the importer can be able to have them released without presenting the shipping documents, with the exception of bill of lading.
- There is no guarantee of payment. The exporter could incur storage costs if importer fails/delays to pay.
- If the importer refuses or is unable to pay, the exporter has to find another buyer, pay for return or even abandon the shipment.
Parties involved in Documentary collection
- Principal: seller, exporter, beneficiary, remitter, drawer of the draft
- Remitting Bank: exporter’s bank handling the collection
- Collecting Bank: usually the importer’s bank
- Drawee: importer, buyer, payee
Documentary Collections Process
- The importer (buyer) and exporter (seller) make a buying/selling deal, agree on shipment terms and payment method as documentary collection.
- The exporter, through a freight forwarder, arranges for the delivery of goods to the port/airport of departure.
- The forwarder delivers the goods to the point of departure and prepares the necessary documentation based on instructions received from the exporter.
- Export documents and instructions are delivered to the exporter’s bank by either the exporter or the freight forwarder.
- The exporter’s bank sends the documents to the importer’s bank together with the exporter’s instructions.
- The importer’s bank, on receipt of documents, contacts the importer and requests payment or acceptance of the bill of exchange (draft).
- The importer’s bank hands over the documents to the importer on payment or acceptance of a bill of exchange (draft)
- The importer presents documents to the shipping company and receives the goods.
- The importer’s bank remits funds to the exporter’s bank or advises that the draft has been accepted.
- Upon receipt of funds, exporter’s bank transfers money in the exporter’s account.
Shipment By Air in Documentary collection
An Air Waybill (AWB) is a straight consignment; it is not negotiable. The buyer does not need the AWB to pick up the goods. In other words, the buyer can obtain the merchandise without paying for it.
To avoid this possibility, when shipping by air, the AWB should always be consigned to the buyer’s bank. This prevents release of the merchandise until such time as the buyer’s bank issues an Air Release to the carrier. This is done only after the buyer has made payment or accepted the draft.
International rules for Documentary Collections
Collections are subject to a set of international rules entitled Uniform Rules for Collections (URC), 1995 Revision, International Chamber of Commerce (ICC) Publication No. 522. These are the rules that banks apply for handling of documentary collections.
Any company importing or exporting on a documentary collection basis should be familiar with the URC 522, as it has a direct impact on how the collection is handled and what procedures the banks follow.
You can get a copy of the rules by contacting the Bank or the ICC.