Documentary Collection

A procedure that allows a seller to give their bank instructions to forward trade-related documents to the bank of a buyer

What is Documentary Collection?

Documentary collection is a procedure that allows a seller to give their bank instructions to forward trade-related documents to the bank of a buyer. The instructions are normally accompanied by a request for the documentation to be presented to the buyer for payment. The request and instructions include the terms and conditions that dictate when the documents can be availed to the buyer.

 

Documentary Collection
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Should the buyer submit the relevant shipping documents, the business or person(s) may clear the purchases through customs and obtain possession. The documents are availed to the buyer once they’ve made and finalized payment. The process is normally termed “documents against payment.”

Another way for the buyer to obtain the documents is by acceptance of a bill of exchange, which is provided by the seller. The process termed “documents against acceptance” provides information on a future date of which the amount due to the seller is payable. The date is known as the maturity date.

Imports and exports are considered major contributors to the success of countries and businesses alike. The documentary collection allows for the enablement and easing of import and export processes. Although they do not provide security at the same levels as letters of credit, the costs associated with documentary collection are lower.

With documentary collections, banks serve as channels for the documentation, but they do not guarantee payments, as is common with letters of credit. A bank can only debit the account of a buyer with the buyer’s authorization.

 

Summary

  • Documentary collection is a procedure that allows a seller to give their bank instructions to forward trade-related documents to the bank of a buyer.
  • It allows for the enablement and easing of import and export processes.
  • Documentary collection does not provide sellers or exporters many options in case buyers or importers are unable to meet payment obligations.

 

Documentary Collection Process

The process begins with a buyer making an order or a purchase of goods. The exporter or seller then makes arrangements to send the goods to the buyer or importer. The seller submits a collection order to his or her bank. The seller’s bank then submits the collection order to the bank of the buyer.

The buyer’s bank presents a “presentation document” to the buyer, who then must make a payment or acceptance to his or her bank. The payment or acceptance is sent to the seller’s bank by the buyer’s bank, and the seller’s bank submits this payment or acceptance to the seller.

 

Documents Against Payment Collection

A document against payment collection is initiated with the exporter shipping goods to a buyer. The seller or exporter supplies their bank with the shipping (and other relevant) documentation, which then forwards the documents to the importer or buyer’s bank.

As stipulated above, the documents are typically accompanied by instructions regarding the collection of payment from the buyer.

With this procedure, the bank can only avail the documents to the buyer once the payment has been made and finalized. After payment completion, the buyer’s bank (also known as the collecting bank) transfers the funds to the bank of the exporter, who then transmits the funds to the exporter/seller.

 

Documents Against Acceptance Collection

In such a procedure, an exporter or seller provides a credit arrangement to the buyer. The extension of credit is done through a time draft, which means that the documents related to the sale of goods are availed to the buyer or importer once he or she has accepted and signed the time draft.

The time draft – a bill of exchange that allows for a buyer to make payment at a later stage – legally binds the buyer to make the payment on a specified date.

When the specified date is reached, the collecting bank reaches out to the buyer for payment. Once the payment has been made, the buyer’s bank – also known as the collecting bank – transfers the funds to the bank of the exporter, who then transmits the funds to the exporter/seller.

 

When to Use Documentary Collections

Documentary collections do not provide sellers or exporters many options in case buyers or importers are unable to meet payment obligations. That’s why it is important for documentary collections to be used under certain conditions.

The conditions that make documentary collections ideal include the presence of a long-standing and well-established relationship between the seller and the buyer, a time when the country of the buyer is economically and politically sound, and in cases when a letter of credit is not acceptable to the buyer.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Bank Statement
  • Bill of Lading
  • Balance of Payments
  • Trade Credit

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