How Does Documentary Collection Work?
What Is A Documentary Collection?A documentary collection is a legal procedure that allows an exporter to instruct his bank to forward shipment documents (also known as trade-related documents or evidential documents) to the importer’s bank to receive the payment for the shipped goods or services. In simple words, it is a type of transaction where the seller gets the payment for his delivered goods & services from the buyer upon the presentation of shipment documents.
The exporter’s bank collects payment from the importer’s bank after exchanging shipment documents. It involves bills of exchange/draft that require the importer to pay the amount either at sight or on a specific future date. The bank acts as an agent for the seller to present the documents to the buyer through its bank and gets the payments for the exchanged goods & services.
What Is The Process Of Documentary Collection?Documentary collection is an essential type of trade finance instrument that mitigates the payment risks for the exporters. The process of the documentary collection starts with a buyer ordering purchase of goods. Here is the detailed step-by-step guide on documentary collection. Let’s have a look:
1. Both The Importer And Exporter Agree To Trade- This is the very first step of initiating a documentary collection process where the buyer makes an order for purchasing the goods.
- Both the parties-to-the-contract enroll in the trade agreement and agree to the terms & conditions of the transactions.
- It states the goods and services to be delivered, mode of transport & shipping, delivery times, documents to be produced by the buyer, the mode of payment and actions to be taken in case of litigation.
- It is highly recommended to take professional Documentary Collection Services to make the process of filling the forms easier and to avoid any omission of essential points.
2. The Exporter Ships The Goods
- As the next step, after getting an agreement on the terms & conditions of the contract, the exporter ships the ordered goods to the buyer, in the same way, size, and quantity as mentioned in the contract.
- He then receives carrier documents proving that the process of take-over and shipping has taken place.
- The goods can be of several types such as Consumer Goods, the goods that can be used for manufacturing other products, or industrial machinery, etc.
3. Exporter Sends The Documents to His Bank
- Apart from shipping documents, it also covers - Commercial documents (such as Invoice, packing list or certificate of origin, etc.), Technical Documents (like certificates of analysis), Transport Documents (Bill of lading, air waybill or sea waybill, etc.), or financial documents (commercial paper, etc.)
4. Importer’s Bank Forwards The Documents
- After receiving the documents from the exporter, the remitting bank (exporter’s bank) checks whether the content of the documents matches the instructions.
- You need to keep in mind that the bank is not responsible for verifying the authenticity of the document. In case of any defect or problem, it can notify the client.
- If there are no errors in the shipment documents, the remitting bank sends them to the importer’s bank as per the instructions given by the exporters.5. Presentation Of Documents
- After getting the shipment documents from the remitting bank, the importer’s bank notifies the importer of the same.
- The bank instructs him to take further actions for paying the exporter.
6. Payment To The Exporter
- This is the final settlement step of the contract where the importer makes payment to his bank to further pay to the exporter’s bank.
- The exporter’s bank credits the payment to the exporter.Being one of the most popular types of trade finance instruments other than letters of credit, the documentary collection offers payment security to the exporters in the international trade transactions as a legal authority i.e. the bank has control over the goods through the title of the goods.