Documentary collection is a form of trade finance where an exporter receives payment for goods from an importer through the mediation of their respective banks, after the exchange of required documents. The exporter’s bank collects funds from the importer’s bank in return for documents that release the title to the shipped goods, usually once the goods arrive at the importer’s destination.
Key Insights
- Documentary Collection: Method of trade finance where an exporter’s bank forwards documents to an importer’s bank and collects payment for shipped goods.
- Prevalence: Less common than advance cash payment and open account terms, especially in regions with weak contract enforcement.
- Payment Forms: Documents against payment require the importer to pay the draft at sight, whereas documents against acceptance allow for payment by a specified date.
Understanding Documentary Collection
Documentary collection involves the exporter receiving payment from the importer in exchange for shipping documents essential for clearing goods through customs. These documents usually consist of a commercial invoice, certificate of origin, insurance certificate, and packing list.
Central to documentary collection is the bill of exchange or draft, which is a formal payment demand from the exporter to the importer. This method is less common than others like letters of credit or advance payment because, while economical, it is riskier. It tends to be used in transactions between trusted parties or in countries with strong legal and contract enforcement.
A sight draft reduces the exporter’s risk as the buyer’s bank won’t release the documents without payment. However, no financial responsibility is assumed by either side’s bank in such transactions.
Types of Documentary Collection
Documentary collections fall into two principal categories based on when the exporter receives payment:
- Documents against Payment: The importer must pay the draft’s face amount at sight, ensuring payment before any shipping documents are released to them. This is the more common form due to reduced risk for the seller.
- Documents against Acceptance: The importer agrees to pay on a specified date, upon which acceptance of the time draft leads to the bank releasing the documents.
Steps in Export and Documentary Collection
Here’s a step-by-step guide to the documentary collection process:
- Sale Agreement: The buyer and seller agree on the sale terms, including payment amount, shipping details, and the use of documentary collection. The exporter then dispatches the goods, typically via a freight forwarder.
- Document Preparation and Transmission: The exporter prepares and sends the required documents to their bank (the remitting bank). The remitting bank forwards these documents to the importer’s bank (the collecting bank).
- Receipt and Notification: The importer’s bank receives the documents and informs the buyer, who is then requested to make the payment in exchange for the documents.
- Document Release: Upon the buyer’s payment or acceptance of the draft, the buyer’s bank releases the documents allowing them to collect the merchandise.
Risks of Documentary Collections
Exporter risks vary depending on whether a time draft or a sight draft is used:
- With a time draft, exporters face higher risks since the buyer’s bank releases the documents upon buyer’s acceptance, which means the buyer might already possess the goods when payment is due.
- A sight draft offers limited risks since the buyer’s bank releases documents only upon payment. If the sale falls through, the worst-case scenario for the seller would involve finding another buyer or covering the goods’ return shipping costs.
Related Terms: Letters of Credit, Bill of Exchange, Sight Draft, Time Draft.
References
- International Trade Administration. “Methods of Payment:Documentary Collections”.
- Privacy Shield Framework. “Trade Finance Guide: Documentary Collections”.
