A Documentary Collection would normally comprise a set of commercial documents relating to the goods being exported, which are sent to the Importer's bank along with a Collection Schedule and usually a Bill of Exchange. A set of documents containing a Bill of Lading would normally allow the holder to take possession of the goods. A Collection takes one of the following forms:
Documents Against Payment: the Collection documents are presented to the Importer and released in exchange for immediate payment (payment 'at sight').
Documents Against Acceptance: this applies with a Tenor Bill of Exchange and describes the situation where the Collection documents are released after the Importer has 'accepted' them. Acceptance is signified by the Importer's signature on the Bill of Exchange or other payment authority enclosed in the Collection. Payment will be made at a fixed or determinable future date
Features & Benefits
Easy to use, simpler than a Letter of Credit
Cheaper than alternative secure trading instruments
Increased certainty of payment when collection is 'at sight'
Improves cashflow control for the Exporter
Option to use 'term' collection payment improves cashflow for the Importer (through potential to negotiate an extended credit period).
Key Stages Documentary Collection Process
1. Importer and Exporter negotiate the sale and discuss the contract
2. Exporter sends goods to Importer
3. Exporter sends Collection Schedule and Documents to their bank, the Remitting Bank
4. Collection Schedule and Documents sent from Remitting Bank to the Importers Bank, the Presenting/Collecting Bank
5. Documents are presented to Importer by Presenting/Collecting Bank for payment if a 'Sight Bill' or acceptance if a 'Term Bill'
6. Importer pays Bill if 'at sight', or accepts the Bill if 'term'
7. Money sent to Remitting bank if 'at sight', notice of acceptance sent if 'term'
8. Remitting Bank sends money to Exporter or holds acceptance Bill for presentation at maturity
Key Stage 1. Importer and Exporter negotiate the sale and discuss the contract
The more information that is determined at this stage, the less likelihood there is of problems occurring and the more efficient the trading process will be.
Discussions should aim to ensure that the contract includes all the details of the transaction. These would typically cover the following, though they will vary according to specific countries, goods etc.
Financial Considerations
Individual Importer credit limits, with 'in house' and credit insurer if applicable. (Use of credit insurance should never be revealed to the Importer) - consideration for Exporter
Payment terms, ie. upon receipt of shipping documents by the Importer's Bank or have credit terms been agreed
Currency of contract/payment
Exchange control regulations
The need for any import licenses
Banking details - Importers details to be provided to Exporter.
Legal Considerations
Terms and conditions of sale/purchase
Agency or distribution arrangements
Retention of title. If the Importer refuses or is unable to pay, does the Exporter still have access and control over the goods - consideration for Exporter
'Protest' re. unaccepted/unpaid bills of exchange - consideration for Exporter
Usefulness of appointing a 'Case of need' - consideration for Exporter
Consignment stock - restrictions on repatriating unused stock - consideration for Exporter
Product liability insurance
Counterfeit supplies - consideration for Importer.
Supply Considerations
Delivery periods on goods
Delays with particular goods
Preference for non-standard quantity packing
Special requirements such as pre-shipment fumigation
Pre-shipment inspection/price comparison requirements.
Shipping Considerations
Methods of transport available; direct or indirect
Frequency of departures
Approximate costs of alternative methods/routes
Type of packing
Correct Incoterm according to contract/transport mode
Optimum delivery points, i.e. transported from where to where
Required documentation, provided by Exporter to Importer
Insurance of goods
Delays for consular work or inspection formalities.
Key Stage 2. Exporter sends goods to Importer
Shipment of the goods takes place via the agreed method, under the terms of the contract.
Key Stage 3. Exporter sends Collection Schedule and Documents to their bank, the Remitting Bank
The Exporter then provides documents to their bank, the Remitting Bank, and asks them to undertake the documentary collection.
Key Stage 4. Collection Schedule and Documents sent from Remitting Bank to the Importers Bank, the Presenting/Collecting Bank
The Remitting Bank is the Exporter's bank, the Presenting Bank is the Importer's Bank.
The Presenting/Collecting Bank is any bank other than the Remitting Bank involved in processing the collection.
Choice of 2 delivery channels
There are two alternative delivery channels: paper-based; e-banking.
Paper-based Exporter completes a paper Collection schedule, encloses the relevant documentation and forwards it to the Exporter's bank for checking and onward remittance to the Importer's bank (the 'Presenting/Collecting Bank').
E-banking Exporter prepares an electronic Collection schedule using an electronic delivery channel and then posts the documents direct to the Importers' bank.
The cost of the collections service will be determined by the choice of delivery channel, with electronically originated applications being the lowest cost option.
Method of Sending
For the two channels of delivery described above, the documents can be sent to the Importer's bank by either of the two methods below. The Exporter decides what method is used. This is indicated on the schedule form:
1. Mail - the standard choice unless otherwise indicated.
2. Courier - useful when documents need to be presented quickly.
Key Stage 5. Documents are presented to Importer by Presenting/Collecting Bank for payment if a 'Sight Bill' or acceptance if a 'Term Bill'
The Presenting/Collecting Bank contacts the Importer to provide details of the schedule and documents sent to them from the Remitting Bank. The documents are held by the Presenting/Collecting Bank and will not be released until the terms given by the Exporter have been met.
It is important to note that the Presenting/Collecting Bank is acting as agent for the Exporter. This contractual agency agreement overrides any relationship the Presenting Bank might have with the Importer. The Presenting Bank must only act in accordance with the instructions contained in the schedule
Key Stage 6. Importer pays Bill if 'at sight', or accepts the Bill if 'term'
Settlement can be by immediate payment if the Bill is 'at sight', or acceptance if the Bill is 'term' ie. where a credit period is given. With term bills, the Importer accepts the Bill of Exchange and in so doing, undertakes to make payment on an agreed future date. It is important to note that payment is not guaranteed by the Importer's bank (Presenting Bank) even when the Importer has accepted a bill. At maturity, the Presenting Bank will contact the Importer and present the accepted bill for payment.
Key Stage 7. Proceeds sent to Remitting Bank if 'at sight', notice of acceptance sent if 'term'
When payment has been received by the Presenting Bank through either 'sight' or 'acceptance', they pay the Remitting Bank by mail or SWIFT (Society for Worldwide Interbank Financial Telecommunications).
Key Stage 8. Remitting Bank sends proceeds to Exporter or holds accepted Bill for presentation at maturity
Payment is made to the Exporter either at sight, or on maturity of a term bill; both less charges due.
If payment is refused
Although there is a contractual arrangement between Importer and Exporter, the Importer cannot be forced to pay by a bank under the Documentary Collection.
If payment is refused when the documents are to be released on payment (ie. at sight)
If the Importer refuses payment, the Presenting/Collecting Bank advises the Remitting Bank and therefore the Exporter, and asks for their further instructions. The Presenting/Collecting Bank to the order of the Remitting Bank holds documents.
The Presenting/Collecting Bank may arrange 'Protest' (or other Legal process) of the Bill of Exchange if the Exporter stipulated this on the schedule.
If acceptance is refused when the documents are to be released on acceptance
If the Importer refuses acceptance, see above.
If accepted and not paid on the due date
The Bill of Exchange may have been accepted, but then payment is refused on the due date. However the documents will have been released to the Importer upon acceptance. The Presenting/Collecting Bank will then advise the Remitting Bank and ask for further instructions.
Avalisation
In order to avoid the above, the Exporter may wish to consider asking that documents be released against the Importer's acceptance of the Bill of Exchange and a guarantee of payment from the Presenting/Collecting Bank. This is called Avalisation.
We recommend that if payment is refused, the two parties try to resolve the matter between them, whether the concerns are contractual or relating to the goods themselves.
We would strongly recommend that anyone who is dealing with documentary collections refers to the Uniform Rules for Collections (URC).
