What is Documentary Collection?

Documentary collection is a settlement method used in international trade. In this payment method banks act as intermediaries between the buyer and seller to facilitate the exchange of documents and payment.

In a documentary collection, the seller ships the goods to the buyer and submits the shipping documents, such as the bill of lading, commercial invoice, and other relevant documents, to their bank. The seller’s bank then forwards the documents to the buyer’s bank, who holds the documents until the buyer makes payment for the goods or accepts a draft drawn by the seller on the buyer. Once the payment is made or the draft is accepted, the buyer’s bank releases the documents to the buyer, who can then take possession of the goods.

Parties involved in Documentary Collection

Buyer: The buyer in a documentary collection is the importer of goods in the international trade transaction. The buyer is also known as the “Drawee”.

Seller: The seller in a documentary collection is the exporter of goods in the international trade transaction. The seller is also known as the “Drawer” or “Principal”.

Remitting Bank: In a documentary collection, the remitting bank is the seller’s bank. The remitting bank presents the shipping documents to the buyer’s bank and provides the necessary instructions to the buyer’s bank regarding payment and the release of documents. It also collects the payment from the buyer’s bank on behalf of the seller.

Collecting Bank: In a documentary collection, the collecting bank is the buyer’s bank. The collecting bank receives the shipping documents from the remitting bank (seller’s bank). It notifies the buyer about the arrival of documents and requests payment or acceptance depending upon the terms of the collection. The collection bank also collects payment from the buyers and forwards the payment to the remitting bank.

Types of Documentary Collection

Documentary collections are of two types. These are discussed below:

Documents against Payment (D/P):

This is also known as Documentary collection payable on a sight basis. In this type of collection, the exporter or the seller ships the goods to the importer and presents the shipping documents to their bank. The seller’s bank then sends the shipping documents to the importer’s bank. Once the importer or the buyer makes the payment, the buyer’s bank hands over the documents to the buyer using which they can take possession of the goods. Since the documents are handed over to the buyer only after payment is done, this method is also known as cash against documents (CAD).

Documentary collection payable on a sight basis (D/P) is a relatively secure payment method for the seller, as they are assured of receiving payment before the buyer takes possession of the goods. However, it does not provide any guarantee of payment. Because the buyer may decide not take possession of the goods and in such a case they may not come to collect the documents by making the payment.

Documents against Acceptance (D/A):

This is also known as Documentary collection payable on a usance basis. In this type of collection, the seller ships the goods to the buyer and presents the shipping documents along with a draft or bill of exchange to their bank. The seller’s bank then sends all the documents to the importer’s bank. The buyer accepts the draft drawn on them by the seller promising to pay at a future due date. The buyer can take possession of the documents only after it has accepted the draft. The buyer’s bank then receives the payment from the buyer on the due date and forwards the same to the seller’s bank.

Under Documentary collection payable on a usance basis, the seller is assured that the bank will not hand over the documents to the buyer until the draft is accepted. However, the disadvantage here is that there is no guarantee that the buyer will make the payment on the given due date even though it has accepted the draft.

Advantages of Documentary Collection

Advantages of documentary collections are as follows:

Cost-Effective: Documentary collections are less expensive compared to other payment methods such as letters of credit. This is because there are fewer documents involved, and also the banks’ commission are generally lower.

Faster Processing: Documentary collections are usually processed more quickly than letters of credit because the process involved is simple. The involvement of banks in a documentary collection is limited to handling the documents and collecting payment.

Simplified Documentation:

Advantages for Buyer:

  • The buyer can be assured that they will receive the shipping documents after making payment or accepting the draft.
  • For the buyer, risk involved in documentary collection is lesser compared to advance payment.

Advantages for Seller:

  • The seller can be assured that they will receive payment or acceptance before releasing the documents. For the seller, payment risk involved in documentary collection is lesser compared to open account payment.
  • Compared to letters of credit, documentary collections require less documentation. This simplifies the export process for the seller and reduce the burden of compliance with complex regulations.

Disadvantages of Documentary Collection

There are also some disadvantages of using documentary collection in international trade:

Disadvantages for Buyer:

Quality of goods: In case of documentary collection on sight basis, the buyer has to make the payment before receiving the documents. So he will be able to take possession of the goods only after payment is done. The goods received may not be as per required specifications and in such a case the buyer may incur a loss.

Disadvantages for Seller:

Payment Risk: While documentary collections can reduce payment risk compared to open account payment, there is still a risk that the buyer may not pay. In documentary collections there is no bank undertaking to make payment. The seller may not be able to enforce payment if the buyer refuses to pay or accept the documents.

Limited Protection: Documentary collections offer less protection than letters of credit. If the goods are not as described or if there are other issues, the seller may not be able to recover payment through the bank.

Limited Customization: Documentary collections have a standard process and cannot be customized as easily as letters of credit. This can limit the seller’s ability to negotiate favourable terms and conditions.

Delayed Payment: With a documentary collection, the seller has to wait for the documents to be processed and the buyer to make payment. This can result in a delay in receiving payment, which can impact cash flows.

Documentary Collection vs Letter of Credit

Documentary collection and letter of credit (LC) are two widely used payment methods in international trade, but they differ in how work and the level of risk involved for the different parties.

Documentary Collection for CDCS Exam

The Certified Documentary Credit Specialist (CDCS) exam is a certification program offered by the London Institute of Banking and Finance (LIBF) for professionals involved in the field of Documentary Credit or Letter of Credit. If you are preparing for the CDCS exam, you need not study in details about Documentary Collections. Because Documentary Collection is not a part of the syllabi for the CDCS exam. However, a small part is included in the chapter “Documentary credits and other methods of settlement” where various other methods of payment including advance payment and open account transactions are also discussed. Studying that chapter thoroughly should be enough from the exam point of view. You just need to understand what documentary collection is and what are its advantages or disadvantages compared to letter of credits.

Documentary collection FAQs

What are the benefits of using a documentary collection?

Documentary collections are simpler and less expensive than letters of credit, and they offer some degree of security for both the buyer and the seller.

What are the risks of using a documentary collection?

The seller has no guarantee of payment, and the buyer may receive the shipping documents without making payment. Also, the banks only act as intermediaries and do not assume any liability for the transaction.

What types of documents are required for a documentary collection?

The required documents vary depending on the terms of the sale, but typically include the bill of lading, commercial invoice, and packing list.

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