What does documentary collection’ mean?

Documentary collection is a form of trade finance where an exporter is paid for goods by an importer after their banks exchange the required documents. The exporter’s bank receives payment from the importer’s bank after the exporter sends documents relating to the shipped merchandise.

Documentary collection gets its name from the exporter receiving payment from the importer in exchange for the shipping documents. Shipping documents are required for the buyer to clear the goods through customs. Documents include a commercial invoice, certificate of origin, insurance certificate, a packing list, and bill of exchange.

Is documentary collection risky?

Documentary collection has risks for both parties and isn’t ideal for some transactions. That said, documentary collection is simple, fast, and less expensive than a letter of credit. For businesses using documentary collection, producing the right export documents is crucial.

What are the advantages and disadvantages of documentary collections?

For exporters:

Advantage: documents can be recalled

Advantage: risk of payment default is lower

Disadvantage: buyer’s risk and political risk in buyer’s country

For importers:

Advantage: payment is made only after delivery of goods/documents

Advantage: risk of non-delivery is low

Disadvantage: payment is made before goods can be checked for quality/accuracy

Two types of documentary collection

Documentary collection falls into two broad categories, depending on when the exporter receives payment:

1. Documents against payment: requires payment to be made to the bank when the buyer receives the draft, but before any shipping documents are released. This is the most common form of documentary collection because there is lower risk for sellers.
2. Documents against acceptance: requires the importer to pay on a specific date. Once the buyer accepts the time draft, the bank releases the documents to the buyer.

Are there other considerations for documentary collections?

Imports and exports are major contributors to the success of countries and businesses. The documentary collection allows for smoother import and export processes. Although they do not provide the same level of security as letters of credit, documentary collection is lower in cost.

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