Documentary Collection: Meaning, Types, And Process
What Is A Documentary Collection?
A documentary collection (DC) is a type of transaction where the exporter approaches his bank (known as remitting bank) for the collection of payment, which sends documents to the importer’s or buyer’s bank (collecting bank) along with the instructions to further send those documents to the buyer for releasing the payment. In other words, it is a type of trade finance instruments where an exporter is paid for its shipped goods by an importer after the banks of both the parties exchange the required documents. After the presentation of the documents, the exporter’s bank collects funds from the importer’s bank usually after the goods have arrived at the importer’s location.
It is different from a letter of credit. In the case of DC, the exporters can get the payments by presenting its shipping and collection documents to their remitting bank. The remitting bank is responsible for forwarding these documents to the importer’s bank. Then, the importer’s bank pays the exporter’s bank by crediting those funds. However, the role of the banks is limited in the documentary collection as they do not verify the documents, or guarantee the payment. They just guide you through the flow of the documents.
Types of Documentary Collection
There are two types of documentary collections for exporter and importer depending on when the payment is made to the exporter. Here they are as follows:
1. Documents Against Payment Collection - A document against payment collection is executed when the goods have been shipped by the exporter to the buyer. The seller instructs his bank to present and forward their shipping documents to the buyer’s bank. This is the most common form of the DC as it helps reduce the risk for the sellers and makes the importer pay the face amount of the draft at sight. When the buyer is presented with the draft, the payment must be made to the bank.
2. Documents Against Acceptance Collection - In this type of DC, the importer is required to pay the exporter on a specific date or future date. The exporter provides a credit arrangement to the buyer and when the specified date is reached, the collecting bank (the buyer’s bank) approaches the buyer for payment. After the payment, the collecting bank transfers the funds to the exporter’s bank who then transfers the funds to the exporters.
Recommended Read: What Is International Trade Finance? How Does It Work And Types
What Is The Process?
Here the step-by-step guide to the process of documentary collection:
1. The process of the documentary collection begins when the buyer and seller agree on the amount to be paid. It includes shipping details, and that transaction will be the documentary collection.
2. The exporter or seller makes an agreement with the buyer and ships the goods to the buyer. Then, the seller presents a collection order to his bank so that the exporters bank could further submit the collection order to the buyer’s bank for receiving payment.
3. Then, the buyer’s bank releases the documents, known as a “presentation document” to the buyer. Now the buyer is responsible to make a payment or acceptance to his bank.
4. The payment then is sent to the seller’s bank by the buyer’s bank and the seller’s bank submits the payment or acceptance to the seller.
Advantages And Disadvantages of Documentary Collection
1. Safe and reliable assistance from the bank in obtaining export collection.
2. The process is simple, quick, and less expensive than LCs.
3. Easier handling of the documents.
4. Faster receipt of payment.
5. Seller holds the title of goods until the payment is made.
6. Payment warranty to the exporters.
7. Sellers can enhance their business throughout the world.
8. Tracking of outstanding collections.
9. More affordable than LC
10. Money transactions can be executed.
1. The role of the bank is limited and they do not guarantee payment.
2. No verification of the accuracy of the documents.
3. Seller does not get the benefit of a bank guarantee of the payment provided by documentary credit.
4. Possibility of paying for the return transportation if the buyer refuses or unable to pay.
Imports and exports are the two major pillars towards the success of an international business and DC makes the process of global trade easier. Emerio Banque is a private financial institution offering a range of safe and reliable documentary collection services at the best prices.