DOCUMENTARY COLLECTION

What is Documentary Collection?Documentary collection is the collection by a bank of funds due from a buyer against the delivery of documents. The bank, acting as agent for the seller (exporter), presents documents to the buyer (importer) through that party's bank and in exchange receives payment of the amount owed, or obtains acceptance of a time draft for payment at a future date.The liability of the bank under a documentary collection is primarily restricted to following the seller's instructions in forwarding and releasing documents against payment or acceptance.How is Documentary Collection different from an L/C or Open Account?Unlike a letter of the bank does not assume any liability to pay if the buyer does not want or is unable to pay. Compared to open account sales, the documentary collection offers more security to the seller, but less than a letter of credit.When should a Documentary Collection be used?Numerous criteria are applied by businesses when determining which payment instrument to offer as a term of sale. However, in general, a documentary collection would be appropriate where:1) The seller and the buyer know each other to be reliable.2) There is no doubt about the buyer's willingness or ability to pay.3) The political and economic conditions of the buyer's country are stable.4) The importer's country does not have restrictive foreign exchange controls.What are the advantages of a Documentary Collection?1) Simple and inexpensive handling compared to letters of credit.2) Often faster receipt of payment than open account terms.3) Seller retains title to the goods until payment or acceptance is made.What are the disadvantages of Documentary Collection?If the buyer refuses or is unable to pay, the seller has three options, which could be expensive:1) Find another buyer.2) Pay for return transportation3) Abandon the merchandise.Who are the parties involved?1) PRINCIPAL - exporter, seller, remitter, drawer of the draft.2) REMITTING BANK - exporter's bank handling the collection3) PRESENTING OR COLLECTING BANK - usually the buyer's bank.4) DRAWEE - importer, buyer, payee.What types of Documentary Collections are there?1) Documents against Payment (D/P) also known as "Sight Draft" or "Cash against Documents” (CAD). The buyer must pay before the collecting bank releases the title documents.2) Documents against Acceptance (D/A). The buyer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the buyer.What if shipment by air freight?An Air Waybill (AWB) is a straight consignment; it is not negotiable. The buyer does not need the AWB topick up the goods. In other words, the buyer can obtain the merchandise without paying for it. To avoid this possibility, when shipping by air, the AWB should always be consigned to the buyer's bank. This prevents release of the merchandise until such time as the buyer's bank issues an Air Release to the carrier. This is done only after the buyer has made payment or accepted the draft.What are the steps in documentary collection?1) The buyer (importer) and seller (exporter) agree on the terms of sale, shipping dates, etc., and that payment will be made on a documentary collection basis.2) The exporter, through a freight forwarder, arranges for the delivery of goods to the port/airport of departure.3) The forwarder delivers the goods to the point of departure and prepares the necessary documentation based on instructions received from the exporter.4) Export documents and instructions are delivered to the exporter's bank by either the exporter or the freight forwarder.5) Following the instructions of the exporter, the bank processes the documents and forwards them to the buyer's bank.6) The buyer's bank, on receipt of documents, contacts the buyer and requests payment or acceptance of the trade draft.7) After payment or acceptance of the draft, documents are released to the buyer, who utilizes them to pick up the merchandise.8) The buyer's bank remits funds to the seller's bank or advises that the draft has been accepted.9) On receipt of good funds, seller's bank credits the account of the exporter.What is the URC 522?URC 522 stands for The Uniform Rules for Collections, 1995 Revision, International Chamber of Commerce Publication No. 522, the rules that banks apply to the handling of collections.Any company importing or exporting on a documentary collection basis should be familiar with the URC 522, as it has a direct impact on how the collection is handled and what procedures the banks follow.The URC 522 may be ordered from:ICC Books USA1212 Avenue of the AmericasNew York, NY 10036Phone: 212-703-5066 212-703-5066 Fax: 212-944-0012