Documentary Collection

What is a 'Documentary Collection'

A documentary collection is a trade transaction in which the exporter hands over the task of collecting payment for goods supplied to his or her bank, which sends the shipping documents to the importer’s bank together with payment instructions. A documentary collection (D/C) is so-called because the exporter receives payment from the importer in exchange for the shipping documents, with the funds and documents channeled through their respective banks. While D/Cs are less complicated and cheaper than letters of credit, they are riskier for exporters because they do not have a verification process and offer limited recourse if the importer does not pay. They are therefore only recommended in situations where the exporter and importer have a long-standing trade relationship.

BREAKING DOWN 'Documentary Collection'

A key document in documentary collections is the bill of exchange or draft, which is a formal demand for payment from the exporter to importer. D/Cs can be classified into two types, depending on when payment is sought by the exporter: 1) documents against payment (D/P), which requires the importer to pay the face amount of the draft at sight, or 2) documents against acceptance (D/A), which requires the importer to pay on a specified future date.

In a D/P collection, the exporter ships the goods and then gives the shipping documents to his or her bank (which is also known as the remitting bank). The bank forwards these documents to the importer’s bank (known as the collecting bank), which will only release the documents to the importer on receipt of payment for the goods. The collecting bank then remits the funds to the exporter’s bank for payment to the exporter.

A D/A collection differs from a D/P collection because the exporter extends credit to the importer through a time draft in the latter case. Once the importer signs the time draft – which becomes a binding obligation to pay by the due date shown on the draft because of the signed acceptance – the documents are released to the importer. The collecting bank contacts the importer on the due date for payment, which upon receipt is remitted to the exporter’s bank for payment to the exporter.

The exporter’s risk is obviously higher in the D/A collection process, since the exporter has no control over the goods after the importer’s acceptance and may not get paid for them.

In terms of risk, D/Cs are much safer than an open account but have fewer safeguards than a letter of credit, since the banks neither guarantee payment nor verify document accuracy and authenticity. These features can be exploited by fraudsters posing as either the exporter or importer. As a result, D/Cs are not recommended for exports to nations that are politically or economically unstable. Overall, because of their lower cost and simple process, D/Cs are best suited for established trade relationships in sound export markets, and for transactions involving ocean shipments rather than air or land shipments which are more difficult to control.

RELATED TERMS
  1. Trade Finance

    The financing of international trade. Trade finance includes ...
  2. Export

    A function of international trade whereby goods produced in one ...
  3. Cash In Advance

    When an importer must pay the exporter in cash before a shipment ...
  4. Net Exporter

    A country or territory whose value of exported goods is higher ...
  5. Export Incentives

    Monetary, tax or legal incentives designed to encourage businesses ...
  6. Net Importer

    A country or territory whose value of imported goods is higher ...
Related Articles
  1. Markets

    Understanding Net Exports

    Net exports are the difference between a country’s exports and imports.
  2. Markets

    Growth and Politics In Exports

    An export is a good or service that is shipped from one country to another for sale or trade.
  3. Markets

    Interesting Facts About Imports And Exports

    Imports and exports exert a profound influence on the consumer and the economy. Learn what affects these figures, and in turn how these figures affect the economy.
  4. Markets

    Understanding Terms of Trade

    Terms of trade measures a country’s trading efficiency.
  5. Markets

    How Imports And Exports Affect You

    Imports are an important indicator of an economy’s health. In a healthy economy, exports and imports are both growing.
  6. Markets

    What's Trade Finance?

    Essentially, trade finance makes it possible and easy for exporters and importers to trade, and its expansion has accommodated a massive international trade growth.
  7. Markets

    China’s Stock Market Tumbles on Weak Export Data

    China's exports declined by 25.4% in February, imports also dropped by 13.8%, with trade surplus declining to $32.6 billion in February from $63.29 billion in January
  8. Investing

    Banker's Acceptance 101

    A banker's acceptance, a common way of financing international trade activity, provides a relatively safe, short-term vehicle for investors. An acceptance is a negotiable time draft that a bank ...
  9. Markets

    The Biggest Losers From China's Slowdown

    A look at how China's slowdown is impacting countries around the world.
  10. Markets

    Japanese Exports Down for Fifth Consecutive Month

    Japan is an export driven economy and is expected to fall into another recession if exports continue to wither.
RELATED FAQS
  1. Why do long-term care insurers require the loss of two Activities of Daily Living ...

    Find out why an importing or exporting merchant might turn to a banker's acceptance to help facilitate an international trade ... Read Answer >>
  2. What is a trade deficit and what effect will it have on the stock market?

    A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing ... Read Answer >>
  3. How would a standby letter of credit be used during an export transaction?

    Learn what a standby letter of credit is and how it works, as well as how a standby letter of credit is typically used for ... Read Answer >>
  4. What is a forward contract against an export?

    Understand forward exchange contracts in exporting, and learn the purpose of using a forward contract and its advantages ... Read Answer >>
  5. When are you legally required to get a letter of credit?

    Learn how exporters or importers who deal in international trade use letters of credit to ensure that transactions are safe, ... Read Answer >>
  6. How does comparative advantage influence the balance of payments?

    Learn how comparative advantage affects a country's balance of exports and imports, which in turn influences the overall ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center