Documentary Collections

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporters bank), which sends documents to a collecting bank (importers 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).

Key Points
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 (exporters bank) and the collecting bank (importers 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 exporters remitting bank sends the documents to the importers 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 exporters 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 importers 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. Time of Payment After shipment, but before documents are released

Transfer of Goods

After payment is made at sight

Exporter Risk

If draft is unpaid, goods may need to be disposed of or may be delivered without payment if documents do not control title.

Here is an outline of the process used by creditors to obtain payment using the Documents against Payments process: y The seller (principal) ships goods to the port or airport of the buyer (drawee) and obtains shipping documents. y The seller presents shipping documents to the buyer's bank (presenting bank or collecting bank), authorizing it to release the documents against payment of the draft. Note: Without prior approval, bills of lading must not be consigned to the buyer's bank as this might entail expenses or obligations that could be incurred in the event of non-payment by the buyer. y The Collection Form is then filled out completely. The documents and original form are delivered directly to the collecting/presenting bank with only copies of the form being sent to the seller's bank for recording and monitoring the collection. y The buyer's bank receives the collection form and accompanying documents, records the collection for monitoring purposes and sends a notice to the buyer, giving them collection details and instructions. y Upon receipt of the collection notice, the buyer must decide whether to accept or reject the collection terms. If the terms are not acceptable by the buyer, notice should be communicated promptly. If the collection terms are acceptable, the buyer remits payment to the presenting bank.

Upon receipt of payment from the buyer, collection records are adjusted to reflect payment and instructions for payment to the seller's bank.

y y

Release of documents to the buyer is initiated. Funds are transferred to the seller's bank (remitting bank) by S.W.I.F.T., wire transfer or air mail, as instructed.

The seller's bank receives the payment, notifies the seller and credits the seller's account.

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. Time of Payment Transfer of Goods Exporter Risk On maturity of draft at a specified future date Before payment, but upon acceptance of draft Has no control of goods and may not get paid at due date

Under the documents against acceptance (D/A) the buyer does not have to pay immediately. The buyer is given a credit period. He only pays on the maturity date of the accepted Bill of Exchange, which may be 30 days, 60 days, 90 days later or even longer. This method offers greater flexibility to the buyer in his cash flow and liquidity management as by the time he is required to pay, he should be able to sell the goods and secure payment from his debtors. Under this method, the seller is required to ship the goods first to the buyer. Upon shipment, the seller will obtain all the necessary documents like Bill of Exchange, Invoice, Bill of Lading (or other transport documents), Insurance Policy, Certificate of Origin and etc. He is also need to complete a collection order (furnished by his bank) with the appropriate instruction.

The documents then will be presented to his banker (Remitting bank) where the documents will be checked to ensure they tally with the collection order. These documents will be air couriered to the buyers bank (Collecting bank). Upon receipt of the said documents, the collecting bank will present the Bill of Exchange to the buyer for acceptance. Acceptance means the buyer has to endorse on the back of the Bill of Exchange with a company seal. Upon acceptance, the Bill of Exchange will be returned to the collecting bank for safe keeping and the rest of the documents are delivered to the buyer to take possession of the goods. The collecting bank will notify the remitting bank of the acceptance as well as the maturity date. On maturity, the collecting bank shall debit the buyers account and remit the proceeds via MT202 to the remitting bank. What if the buyer fails to pay on maturity? In the first place, can the buyer refuse to pay under documents against acceptance? This is in fact the biggest risk faced by the seller under this method of payment. When the buyer refused to pay, the collecting bank will not pay the remitting bank which means that the seller will not receive his payment. In this case, the seller has to resolve the problem with the buyer. The remitting bank and the collecting bank are only acting as an agent and can not enforce any legal avenue to obtain payment from the buyer. Collections is not governed by the UCP but by another set of rules known as Uniform Rules for Collections (URC).