What is Documentary Collection?
Documentary Collection is a trade finance method where the exporter’s bank acts as an intermediary to collect payment for shipped goods. The bank forwards the necessary documents to the importer’s bank, ensuring that the payment is only made upon the successful presentation of documents.
Types of Documentary Collection
Documents Against Payment (D/P)
In a Documents Against Payment arrangement, the importer receives documents necessary for customs clearance only after making immediate payment to the collecting bank.
Documents Against Acceptance (D/A)
In a Documents Against Acceptance arrangement, the importer receives the documents against acceptance of a draft, agreeing to pay by a specified future date.
How Documentary Collection Works
Steps in Documentary Collection
- Agreement: Exporter and importer agree on the terms of sale and documentary collection.
- Shipment: Exporter ships the goods and prepares the required documents.
- Submission: Exporter submits documents to their bank (remitting bank).
- Forwarding: The remitting bank forwards documents to the importer’s bank (collecting bank).
- Notification: Collecting bank notifies the importer of the received documents.
- Payment or Acceptance: Importer either makes payment (D/P) or accepts the draft (D/A).
- Release of Documents: Collecting bank releases the documents to the importer upon payment or acceptance.
- Remittance: Collecting bank remits the proceeds to the remitting bank.
- Credit: Remitting bank credits the exporter’s account.
Key Considerations
- Security: Ensures exporter gets paid only when conditions are met.
- Costs: Involves banking fees which vary based on the complexity and terms.
- Time: Takes less time compared to letters of credit but still involves processing.
Best Practices in Documentary Collection
- Clearly define terms and conditions in the sales contract.
- Ensure accurate and complete documentation to avoid delays.
- Understand the legal jurisdiction governing the transaction.
Historical Context
The concept of documentary collection has evolved alongside international trade. Traditionally, merchants employed reputable go-betweens to facilitate payments. With the advent of modern banking, documentary collections have become more standardized and regulated, thus providing a structured mechanism for trade finance.
Practical Examples
Scenario 1: Documents Against Payment (D/P)
An exporter in Germany ships machinery to an importer in Brazil. Upon shipping, the German exporter sends the necessary documents to their bank. The bank then forwards these documents to the importer’s bank in Brazil. The Brazilian importer must pay the collecting bank to retrieve the documents, enabling customs clearance.
Scenario 2: Documents Against Acceptance (D/A)
A textile exporter in India ships goods to a retailer in the USA. The Indian exporter submits the documents and a draft (bill of exchange) to their bank. The collecting bank in the USA notifies the importer and presents the draft for acceptance. The importer accepts the draft, agreeing to pay at a later date, and collects the documents.
Comparisons with Related Terms
- Letters of Credit (L/C): A more secure but costlier alternative where a bank guarantees payment upon presentation of specified documents.
- Open Account: Riskier for exporters, where goods are shipped and delivered before payment is due.
FAQs
What is the difference between D/P and D/A?
Is Documentary Collection the same as a Letter of Credit?
What are the risks associated with Documentary Collection?
Can Documentary Collection be used for domestic transactions?
References
- International Chamber of Commerce. “Uniform Rules for Collections (URC 522)”.
- Hinkelman, Edward G., and Sibze, Sibrahim A. “Dictionary of International Trade: Handbook of the Global Trade Community.”
- Bragg, Steven M. “Billing and Collections Best Practices.”
Summary
Documentary Collection is a pragmatic method of securing payments in international trade by leveraging banking intermediaries to handle essential documents and payment terms. It is crucial for businesses engaged in cross-border transactions to understand the mechanisms, benefits, and risks associated with Documentary Collection to optimize their trade finance strategy.
