Documentary Collection

What is Documentary Collection?

Documentary collection is a form of trade finance where the importer pays the exporter after the required documents have been exchanged between the two banks. The exporter’s bank usually collects funds from the importer’s bank after the goods arrive at the importer’s location in exchange for documents releasing title to the shipped goods.

key takeaways

  • Documentary collection is a form of trade finance where the exporter’s bank forwards the documents to the importer’s bank and collects payment for the goods shipped.
  • Documentary collections are less common than cash advance and credit terms, especially in countries where contracts are poorly enforced.
  • The payment document requires the importer to pay the draft amount at sight. Acceptance documents require payment by a specified date.

Understanding Documentary Collections

Documentary collection is when the exporter receives payment from the importer in exchange for shipping documents. Buyer needs to provide shipping documents to clear through customs and pick up the goods. They include commercial invoices, certificates of origin, proof of insurance and packing lists.

A key document in a documentary collection is the bill of exchange or bill of exchange, which is a formal request from the exporter to pay the importer.

Documentary collections are less common than other forms of trade finance such as letters of credit and advances. It is less expensive than some methods, but it is also more risky, so it is usually limited to transactions between parties that have established trust or are located in countries with strong legal systems and contract enforcement.

Demand drafts reduce the exporter’s risk because the buyer’s bank will not release the document without payment from the buyer, but the banks of both parties are not financially responsible in a documentary collection transaction.

Two Documentary Collections

Documentary collections fall into two basic categories, depending on when payments are made to exporters:

  1. The payment document requires the importer to pay the face value of the draft at sight. In other words, payment to the bank must be made when the bill of exchange is presented to the buyer and before any shipping documents are issued. This is the most common form of documentary collection because it reduces seller risk.
  2. Rejection documents require the importer to pay by the specified date. Once the buyer accepts the time draft, the bank releases the document to the buyer.

Export and Documentary Collection Steps

Here is the step-by-step process:

  1. A sale occurs when the buyer and the seller agree on the payment amount, shipping details, and that the transaction will be a documentary collection. The exporter then ships the goods to the port or location where the goods were exported, usually through a freight forwarder.
  2. Documents are prepared and sent to the exporter’s bank, also known as the remittance bank. The exporter’s bank then forwards the documents to the importer’s bank, the receiving bank.
  3. The importer or buyer’s bank receives the document and informs the buyer that the document has been received. The buyer’s bank requires payment from the buyer in exchange for documents.
  4. Once the buyer’s bank has paid, or the buyer has accepted the bill of exchange, the bank releases the document to the buyer. Buyers use documents to collect merchandise.

Additional Notes: Risks of Documentary Collection

Exporters using demand drafts are at higher risk than sight drafts because the buyer’s bank will release the document if the buyer accepts the demand draft – meaning the buyer may already have the goods by the time payment is due .

Seller’s risk is limited to demand drafts. This is because the buyer’s bank does not issue the documents required to obtain the goods until payment is made. In the worst case, the seller will have to find another buyer or pay to ship the goods back.

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