What is a documentary collection?
A documentary collection is a payment method used in international trade in which the seller’s bank acts as an intermediary in the transfer of commercial documents to the buyer in exchange for payment or acceptance of an obligation to pay in the future. Unlike a Letter of Credit (LC), the bank does not guarantee payment, but only acts as an intermediary in the transaction. Documentary collection is most commonly used in situations where the exporter and importer already have an established business relationship and the risk of buyer insolvency is relatively low.
Frequently asked questions (FAQ)
1. How does Documentary Collection work?
The process of Documentary Collection begins with the exporter sending the goods to the buyer but not yet handing over the documents required for collection. The exporter then submits the documents to his bank, which sends them to the buyer’s bank together with payment instructions. The buyer’s bank informs its client that payment must be made or that the payment obligation must be accepted in the future. After the payment has been made or the bill of exchange has been accepted, the buyer receives the documents that entitle him to collect the goods. Finally, the buyer’s bank transfers the funds to the exporter’s bank, which then transfers them to the seller.
2. What are the different types of documentary collection?
There are two main types of documentary collection. The first is D/P (Documents Against Payment), in which the buyer receives the documents only after full payment has been made. The second variant is D/A (Documents Against Acceptance), where the buyer accepts the obligation to pay in the future, e.g. by signing a bill of exchange, and the documents are issued to him immediately.
3. What are the main advantages of documentary collection?
Exporters who use documentary collection gain control over the release of documents because the buyer receives them only after the payment conditions have been met or the obligation has been accepted. It is a cheaper alternative to a documentary letter of credit, and at the same time provides greater certainty of payment than open account. The buyer, on the other hand, benefits from the opportunity to complete the transaction without having to block funds in advance, as is the case with a letter of credit. In addition, they can negotiate the payment terms, including the option to accept the obligation to pay at a later date (D/A).
4. What are the risks associated with Documentary Collection?
Despite its advantages, Documentary Collection does involve certain risks. First of all, banks only act as intermediaries and are not liable for non-payment by the buyer. There is also the possibility that the importer will refuse to accept the goods, which can lead to problems with their recovery by the exporter. In addition, the buyer may delay payment, which negatively affects the seller’s liquidity.
5. In which industries is Documentary Collection used?
Documentary collection is commonly used in raw materials trading, including transactions in oil, steel, timber and agricultural products. It is also used in the industrial sector, especially when selling machinery and equipment to foreign markets. In retail, this method is used to import products from foreign suppliers.
Documentary Collection is a popular payment method in international trade, which provides more security than open payment, but does not give a full payment guarantee, as in the case of a documentary letter of credit. It is mainly used in transactions between companies that already trust each other, but want to secure the release of documents until the payment is settled.
