Documentary Collections
Introduction to
Documentary Collection
Documentary Collection is a Global trade solution method used to help exporters receive payment for goods. In this process, the exporter’s bank sends important shipping and ownership documents to the importer’s bank. The importer must make the payment (or commit to pay at a later date) in order to receive these documents. Since the documents are needed to claim the goods, this system helps ensure the exporter gets paid before the buyer gains control of the shipment.
Key Points
Documentary Collection is a trade finance technique where payment is made in exchange for documents that prove goods have been shipped. In this process, the exporter’s bank sends the necessary shipping documents to the importer’s bank. The importer’s bank then collects payment from the importer before releasing the documents, which are essential for taking ownership of the goods.
This method is less commonly used compared to other payment methods like advance payments or open accounts, especially in regions with weak contract enforcement. There are two main types of documentary collections: Documents against Payment (D/P) and Documents against Acceptance (D/A). In D/P, the importer must make the payment immediately upon presentation of the documents. In D/A, the importer agrees to make the payment on a specified future date, as outlined in the contract.
Understanding Documentary Collection
In a Documentary Collection, the exporter provides a set of important shipping documents—such as invoices, certificates of origin, insurance certificates, and packing lists. These documents are necessary for the buyer to clear the goods through customs and take delivery of them. One of the key documents in this process is the bill of exchange (or draft), which serves as a formal request for payment from the exporter to the importer.
While Documentary Collection is not as widely used as methods like letters of credit or advance payment, it can be a cost-effective option. However, it involves more risk and is typically used when the trading parties trust each other or when operating in countries with strong legal systems that ensure the contract is enforceable.
Types of Documentary Collection
- Documents Against Payment (D/P): In this arrangement, the importer is required to pay the full amount specified in the shipping documents upon presentation. The pof bank releases the documents to the importer only after receiving the payment. This method provides greater security to the exporter, as payment is ensured before the goods are released.
- Documents Against Acceptance (D/A): Here, the importer accepts a time draft, committing to pay the specified amount at a future date. The bank releases the shipping documents to the importer upon acceptance of the draft. This approach offers the importer a deferred payment option but carries more risk for the exporter, as payment is not immediate. you can refer to this article to understand better
Steps in Documentary Collection
Below is an example of a step-by-step process:
- Sale Agreement: The buyer and seller agree on the terms of the transaction, including payment and shipping details.
- Document Preparation: The exporter prepares and sends the shipping documents to their bank, known as the remitting bank.
- Forwarding Documents: The remitting bank forwards the documents to the importer’s bank (the collecting bank).
- Payment Collection: The collecting bank informs the importer of the documents and requests payment (for D/P) or acceptance (for D/A).
- Document Release: Once payment is received or the draft is accepted, the bank releases the documents to the importer. The importer completes the process of Documentary Collections.