Documentary Collections

Introduction to
Documentary Collection

Documentary Collection is a method used in trade finance where an exporter gets paid for goods by exchanging documents between banks. In this process, the exporter’s bank sends the necessary documents to the importer’s bank. The importer’s bank then receives payment from the importer in return for these documents, which are essential for taking ownership of the delivered goods.

Key Points

  • Definition: Documentary Collection is a trade finance technique where payment is made against documents that prove the shipment of goods.
  • Process: The exporter’s bank sends shipping documents to the importer’s bank, which then collects payment from the importer.
  • Commonality: This method is less frequently used compared to advance payments and open accounts, especially in regions with weak contract enforcement.
  • Types of Collections:
    • Documents against Payment (D/P): Payment must be made immediately upon presentation of the draft.
    • Documents against Acceptance (D/A): Payment is made on a specified future date.

Understanding Documentary Collection

In a Documentary Collection, the exporter provides shipping documents, such as invoices, certificates of origin, insurance certificates, and packing lists. These documents are essential for the buyer to clear the goods through customs and take delivery. A crucial document in this process is the bill of exchange or draft, which serves as a formal demand for payment from the exporter to the importer. While Documentary Collection is not as common as methods like letters of credit or advance payment, it can be a cost-effective option. However, it carries more risk and is usually utilized between trusted parties or in countries with strong legal systems.

Types of Documentary Collection

Documentary collections fall into two basic categories, depending on when the payment is made to the exporter:

  1. Documents against Payment (D/P):
    • The importer must pay the draft amount immediately when presented with the documents.
    • This method is preferred by exporters because it reduces their risk.
  2. Documents against Acceptance (D/A):
    • The importer agrees to pay on a future date.
    • The buyer accepts a time draft, and the bank releases the documents for the goods.

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 uses these documents to collect the goods