What Is a Documentary Collection?
A documentary collection is a process by which an exporter's bank collects funds from the importer's bank in exchange for documents detailing shipped merchandise. A documentary collection is a trade transaction in which exporters allow their bank to act as a collection agent for payment of shipped goods to the buyer.
- A documentary collection is a process by which an exporter's bank collects funds from the importer's bank in exchange for documents detailing shipped merchandise.
- With a documentary collection, exporters allow their bank to act as a collection agent for payment of shipped goods to the buyer.
- Documents against payment (D/P) requires the importer to pay the face amount of the draft at sight. Documents against acceptance (D/A) requires the importer to pay on a specified future date.
Understanding a Documentary Collection
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.
A sight draft reduces the seller's risk because the buyer's bank will not release the documents without payment from the buyer; without the documents, the buyer can not gain access to the goods.
Shipping documents are documents required for the buyer to clear customs and take delivery of the goods. Shipping documents include a commercial invoice, certificate of origin, insurance certificate, and packing list. 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.
Types of Documentary Collections
D/Cs can be classified into two types, depending on when the payment is made to the exporter:
- Documents against payment (D/P) requires the importer to pay the face amount of the draft at sight. In other words, the payment must be made to the bank before the buyer's bank or collecting bank releases the documents. A D/P is also called a Sight Draft or Cash Against Documents.
- Documents against acceptance (D/A) requires the importer to pay on a specified future date. A D/A/ involves the buyer or importer to make a promise to pay, which is called a time draft. Once the buyer accepts the time draft and the promise to pay, the bank releases the documents to the buyer.
Special Considerations: The Documentary Collection Process
The D/C process involves the exporter (or the seller), the importer (or the buyer), the remitting bank (or the seller's bank), and the collecting bank (or the buyer's bank). Below is the step-by-step process:
- The sale is made when the buyer and seller agree on the amount to be paid, the shipping details, and that the transaction will be a documentary collection. Then, the exporter delivers the goods to the port or location where the merchandise will be exported from, which is usually through a freight forwarder.
- The documents are prepared and sent to the exporter's bank, which is also known as the remitting bank. The exporter's bank then forwards the documents to the importer’s bank, which is known as the collecting bank.
- The importer's or buyer's bank receives the documents and notifies the buyer that documents have been received. The buyer's bank requests payment from the buyer in exchange for the documents.
The buyer might pay the collecting bank on sight or called cash against documents, or the buyer might agree to accept a time draft whereby the buyer will pay at a future date. If the importer signs the time draft, it becomes a binding obligation to pay by the due date shown on the draft.
Once the buyer's bank has been paid, or the buyer has accepted the time draft, the bank releases the documents to the buyer. The buyer takes the documents to the point of entry or shipment such as a port and uses the documents to collect the merchandise.
The buyer's bank wire transfers the funds to the exporter's bank or notifies the exporter's bank that the time draft has been accepted. The exporter's bank then pays the exporter once funds have been collected from the buyer's bank.
Other Considerations: The Risks of Documentary Collections
The exporter's risk is higher with a time draft versus a sight draft. The exporter might not get paid in the case of a time draft. Also, the buyer's bank would have released the documents with the buyer's acceptance of the time draft meaning the buyer would have the merchandise.
If the transaction is a sight draft, the seller's risk is limited if the buyer didn't pay. With a sight draft, the buyer would not have access to the goods because the buyer's bank would not release the documents without payment. The seller would have to find another buyer or pay to have the goods shipped back home.
Unfortunately, D/Cs 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. 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.