What is Documentary Collection?
Documentary Collection is a form of trade finance in which an exporter is paid for its goods by an importer after the two parties’ banks exchange the required documents. The exporter’s bank collects funds from the importer’s bank in exchange for documents releasing a title to the shipped merchandise, usually, after the goods arrive at the importer’s location.
Understanding Documentary Collection
Documentary Collection is so-called because the exporter receives payment from the importer in exchange for the shipping documents. Shipping documents are required for the buyer to clear the goods through customs and take delivery. They include and not limited to a commercial invoice, certificate of origin, insurance certificate, packing list, etc.
A key document in a Documentary Collection is a bill of exchange or draft, which is a formal demand for payment from the exporter to the importer.
Documentary collection is less common than other forms of trade finance, such as letters of credit and advance payment. It is less expensive than some methods but also somewhat riskier, so is generally limited to transactions between parties who have developed trust or are located in countries with strong legal systems and contract enforcement.
A sight draft reduces the exporter’s risk because the buyer’s bank will not release the documents without payment from the buyer, but neither side’s bank assumes any financial responsibility in a documentary collection transaction.
Documentary collections fall into two basic categories, depending on when the payment is made to the exporter:
- Documents against payment require the importer to pay the face amount of the draft at sight. In other words, the payment must be made to the bank when the buyer is presented with the draft, and before any shipping documents are released. This is the most common form of the documentary collection because of the reduced risk for the seller.
- Documents against acceptance require the importer to pay on a specified date. Once the buyer accepts the time draft, the bank releases the documents to the buyer.