A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks in exchange for those documents. D/Cs involve using a draft that requires the importer to pathe face amount either at sight (document against payment [D/P] or cash against documents) or on a specified date (document against acceptance [D/A] or cash against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, D/Cs offer no verification process and limited recourse in the event of non-payment. Drafts are generally less expensive than letters of credit (LCs).
• D/Cs are less complicated and less expensive than LCs.
• Under a D/C transaction, the importer is not obligated to pay for goods before shipment.
• The exporter retains the title to the goods until the importer either pays the face amount at sight or accepts the draft to incur a legal obligation to pay at a specified later date.
• Although the title to the goods can be controlled under ocean shipments, it cannot be controlled under air and overland shipments, which allow the foreign buyer to receive the goods with or without payment.
• The remitting bank (exporter’s bank) and the collecting bank (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.
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.
Typical Simplified D/C Transaction Flow
1. The exporter ships the goods to the importer and receives the documents in exchange.
2.The exporter presents the documents with instructions for obtaining payment
to his bank.
3.The exporter’s remitting bank sends the documents to the importer’s collecting 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.
Documents against Payment Collection
With a D/P collection, the exporter ships the goods and then gives the documents to his bank, which will forward the documents to the importer’s collecting bank, along with instructions on how to collect the money from the importer. In this arrangement, the collecting bank releases the documents to the importer only on payment for the goods. Once payment is received, the collecting bank transmits the funds to the remitting bank for payment to the exporter.
Table 4.1 shows an overview of a D/P collection:
Documents Against Acceptance 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 his signed acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a specific date. At maturity, the collecting bank contacts the importer for payment. Upon receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter.
Table 4.2 shows an overview of a D/A collection.