Documentary Collection system in international trade explained

Documentary Collection or bill collection refers to the collection of financial and/or commercial documents. The documentary collection is one of the conventional methods of payment in international trade whereby the seller forwards financial and/or commercial documents to the buyer through his bankers against cash payment or acceptance of a bill of exchange. Unlike a bill under LC/LOU, a documentary collection does not provide an undertaking   from a bank on behalf of importer wherein the beneficiary (exporter) is fully assured of payment.  Here, a bank simply acts as an agent for collection without the promise of payment to the seller on the collection of bills handled by it.

Meaning of Documentary Bills:

When the bill of exchange is accompanied by the bill of lading/Airway bills, L/R, dock warrant, dock receipt, warehouse receipt, etc. evidencing dispatch of goods to the buyer along with the order for the delivery of goods (document of title to goods), is called documentary bills. The documents like commercial invoice, certificate of origin, insurance certificate, packing list, etc. is also to be part of shipping bill to be delivered to the buyer as he needs them to clear the custom and   take delivery of the goods.

Payment of documentary Bills:

The documentary bill may be payable on demand or at a definite future date depending on when payment is sought by the exporter:

1. DP bills: The documents against payment (D/P), which requires the importer to pay the face amount of the draft at sight. The bill will be released to drawee ( importer/buyer) only after payment.
2. DA Bills: The documents against acceptance (D/A), which requires the importer to pay on a specified future date as cited on the bill of exchange. The bills expressed to be payable at a future date are called Usance Bills. These bills bear the terms like ‘after date’ or after sight. ‘After date’ suggests that the due date for payment of the bill will be calculated from the date of the bill. ‘After sight’ means that the due date for payment of the bill will be calculated from the date of presentment to the drawee(buyer/importer) for acceptance of the bill. DA bill will be released to the drawee on acceptance of the bill of exchange by the drawee.

The ‘Remitting Bank ‘(Exporter’s bank) pay the exporter when it receives payments from the presenting Bank (collecting bank/importer’s bank). The banks which involved in the collection process recover their charges/commission from the realization proceeds of the bill handled by them.

Advantages and disadvantages of documentary Collection:

The documentary Collection is a straight forward and cheaper mode of settlement compared to opening of Letter of Credit. Title to the goods can be controlled by the bank until buyer’s payment or acceptance of the bill of exchange. However, major disadvantage is Payment of bills sent for collection is not guaranteed by the bank. Payment date is usually uncertain as the exporter needs to wait for payment, till the remittance received from buyer’s bank. Further, additional costs may be incurred to look for alternative buyer or reshipment of goods if the original buyer refuses to pay or accept the documents. Therefore, the channel of documentary collection used by the exporter out of his experience with regard to dealings of the importer, particularly with reference to  payment records of past and level of confidence that the bill will be paid without  any hassle.

Case of Need Clause:

The case of need is a party in the buyer’s country appointed by the seller who may assist in payment or acceptance of draft or who may be empowered by the seller to act on his behalf.

Documentary Collection is operated under guidelines of the Uniform Rules for Collection, ICC Publication No.522.