Documentary collection / bill of exchange

Documentary collection enables you to make and receive secure global payments.

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What is documentary collection?

Documentary collection (DC) is a transaction where a bank collects payment from a buyer (importer) — on behalf of a seller (exporter). In exchange for payment, the bank will give the buyer documents — proving shipment has been made.

The payment received may be cash or a bill of exchange. This bill of exchange highlights the amount of money due and the date upon which payment is expected.

Bills of exchange or ‘drafts” are a debt instrument and can be thought of as promissory notes. They can be freely traded — from one bank to another.

Exporters may discount or sell a bill of exchange, to a financial institution, in return for a cash advance. Accordingly, bill of exchange discounting is a form of export finance.

Documentary collection — considerations

A collection is a simple and efficient way of settling trade debts. It can be used to make payments, big or small, in any freely traded currency.

In contrast to open account transactions, where goods are shipped and delivered before payment is made, documentary collections (DCs) offer greater security to the exporter. This is due to the importer not being able to take possession of goods, before either making payment or accepting a bill of exchange.

This bill of exchange document includes the underlying sales contact, the amount owed and the number of days from the bill of lading — until when the buyer (importer) is expected to fully pay the seller (exporter).

A bill of exchange can be thought of as credit from a seller to a buyer. This credit is typically earned after developing a strong trading relationship — over time.

Documentary collection is a relatively inexpensive way of making international trade payments. It is cheaper than a letter of credit as there are fewer administrative hurdles, less verification processes and banks do not have any payment obligations (unless the seller specifically asks for the bill of exchange to be guaranteed).

Documentary collections are subject to internationally recognized standards — issued by the International Chamber of Commerce.

How does documentary collection work?

The documentary collection process is similar for both buyer and seller.

As a buyer looking to import goods, you would need to know the terms of collection. Here the seller would either stipulate the terms of payment in his quotation, or you would agree terms in a sales contract.

The contract terms to be determined include the interest rate applied to the bill of exchange, length of credit period (if any), payment date and payment guarantee (If any).

Once terms have been agreed, the seller would dispatch the ordered goods either directly to you, or to your bank (the collecting bank). Concurrently, the seller would have prepared all essential documents (bill of lading, invoice, insurance certificate, certificate of origin etc.) and sent them to the remitting bank (seller’s bank).

The remitting bank’s role is then to send these documents directly to the collecting bank (your bank). The collecting bank will then present the documents to you, and request payment immediately, or in accordance with the bill of exchange.

As an exporter, you may have delivered your goods on a credit basis — via a bill of exchange. This bill of exchange may be discounted or sold to either the exporting bank (your bank) — or another third party financial institution. Before being able to sell the bill of exchange — a guarantee from an acceptable bank and/or an export credit agency will normally be required.

For both parties, expenses may include commitment, margin and management fees — as well as collection and delivery commission fees. A guarantee premium may also need to be paid.

Types of documentary collection

Documents against payment (D/P)

An arrangement where a seller instructs the presenting bank (the buyer’s bank), to release the documents to the buyer — only against immediate payment.

Documents against acceptance (D/A)

Here documents are released to the buyer, by the presenting bank (buyer’s bank), against his acceptance of a bill of exchange.

Benefits of documentary collection

  • Seller has control over goods — documents only transferred after payment
  • Buyer only pays once goods have been shipped or delivered
  • Bill of exchange mechanism — allows importer to buy on credit, and exporter to make more sales
  • Bills of exchange can be discounted or sold by exporter
  • Less costly than a letter of credit (LC)
  • A quicker less complicated process — than with a LC

Limitations of documentary collection

  • Non-acceptance of documents risk — importers failing to “collect” documents from their bank
  • Non-payment risk — importer not making payment on time or at all
  • Low quality goods risk — importers may pay without really knowing the quality of goods shipped

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