Introduction: Documentary collection, a kind of payment used in international commerce transactions, entails the exchange of paperwork between banks. This article gives a general introduction of documentary collection, describing its several forms and how it works while highlighting its advantages and limitations.
Definition and Aim: Documentary collection, commonly referred to as documentary credit, is a method of payment used in international trade. It entails the exchange of shipping-related paperwork between the banks of the buyer and seller, with payment made upon receipt or acceptance of these documents. By guaranteeing that payment is only made upon adherence to the terms and conditions set forth in the agreement, the primary goal of documentary collection is to reduce risks for both parties.
Types of Documentary Collection:
- There are two common types of documentary collection:
- Documents against payment (D/P): Under D/P collection, the buyer must make payment to the collecting bank before receiving the documents, thus gaining possession of the goods.
- Documents against acceptance (D/A): With D/A collection, the collecting bank releases the documents to the buyer upon acceptance of a time draft, creating an obligation to pay at a specified future date.
How Documentary Collection Works:
The documentary collection process typically involves the following steps:
Agreement: The buyer and seller agree to employ documentary collection as the payment method, which is included in the sales contract or purchase order.
Shipment of goods: The seller ships the goods to the buyer in accordance with the agreed-upon terms.
Submission of documents: After shipment, the seller provides the required documents, such as the commercial invoice, bill of lading, and insurance certificate, to their bank (remitting bank).
Remitting bank: The remitting bank reviews the documents and sends them, along with collection instructions, to the buyer’s bank (collecting bank).
Collecting bank: Upon receiving the documents, the collecting bank notifies the buyer and presents the documents for payment or acceptance.
Payment or acceptance: The buyer reviews the documents to ensure compliance with the transaction terms. If the documents are satisfactory, the buyer makes payment to the collecting bank (D/P) or accepts a time draft (D/A).
Release of documents: After payment or acceptance, the collecting bank releases the documents to the buyer, allowing them to take possession of the goods.
Advantages and Considerations :
Documentary collection offers various advantages, such as lower costs compared to other payment methods, seller control over the goods until payment or acceptance, and a simplified process. However, it does not provide the same level of security as a letter of credit and relies on trust between the parties involved. Clear understanding of the terms and conditions, as well as establishing trust with the counterparty, is essential when opting for a documentary collection.
Conclusion:Documentary collection is a widely used payment collection method in international trade, enabling secure transactions through the exchange of documents between banks. Understanding its types, functioning, and associated advantages and considerations helps businesses make informed decisions when choosing their preferred payment mechanism.