“Documentary Collection” (often simply referred to as “document collection”) is a common method used in international trade where the bank acts as an intermediary without providing any guarantee of payment, which differentiates it from a Letter of Credit.

Documentary Collection

Definition

In a Documentary Collection, the seller/exporter entrusts the collection of payment to the bank (the remitting bank), which forwards the documents related to the shipment to the buyer/importer’s bank (the collecting bank or presenting bank) with instructions to release the documents to the buyer against payment (Documents Against Payment, or D/P) or acceptance of a bill of exchange (Documents Against Acceptance, or D/A).

Key Features

Types of Collection:

• D/P (Documents Against Payment): The importer/buyer pays for the goods before receiving the documents.
• D/A (Documents Against Acceptance): The importer/buyer accepts a bill of exchange and agrees to pay by a specific date in the future (like a post-dated check). Only then are the documents that allow them to claim the goods released.

Role of Banks: Banks facilitate the process but do not provide a guarantee of payment. Their primary role is handling documents and following instructions of the exporter.

Document Handover: Essential shipping documents (like the bill of lading, which is necessary to claim the goods) are only handed over to the buyer once the payment or bill of exchange acceptance conditions are met.

Advantages:

For the Buyer:

• Controls the payment process as they don’t part with cash until they get the documents (or agree to do so at a future date under D/A terms).
• Potential for short-term credit if using D/A terms.

For the Seller:

• Greater control over the goods until the bank is instructed to release the documents to the buyer.
• Slightly more security than open account terms, but less than a Letter of Credit.

Risks & Mitigation:

For the Buyer:

• Risk of paying for goods that don’t match expectations (though they have the documents, they might not have seen the actual goods).

For the Seller:

• D/P method: Risk is reduced since the buyer must pay before getting the documents.
• D/A method: Risk of buyer not making payment on the agreed date. This risk is higher than D/P but lower than open account.

To mitigate risks, parties can:

• Insure the goods.
• Use a reputable third-party inspection agency.
• Build trust over multiple transactions.

When to Use Documentary Collection:

• Moderate Trust Relationships: Suitable when the buyer and seller have an established relationship, but still want some security and formality in their transaction.
• Regulatory/Policy Reasons: Some countries and companies have policies or regulations that require certain payment methods, including documentary collections.
• Cost Considerations: Documentary collections are typically less expensive than Letters of Credit.

Conclusion:

Documentary Collection offers a middle ground between the security of a Letter of Credit and the trust-based nature of Open Account terms. It’s essential for both parties to be aware of the nuances of D/P and D/A and decide on terms that match their risk appetite and the nature of their relationship. As always, understanding the specific needs and trust levels of a transaction can guide the selection of the most appropriate payment method.

If you want to learn more about the Tactical buyer role and a standard sourcing process, we recommend “The Sourcing Engine”. The sourcing engine room is build on three courses presenting the basics of a modern sourcing process. Learn about the key activities when preparing, negotiating and implementing a new improved supply chain.

Knowing the importance of payment terms (PT), the value that can be created and implications on the cash flow are important. Learn how to calculate the cost of capital, benefits that can be created and supplier cost for financing the PT. Visit the Payment Terms course.

Note: Illustration to the post was created by Chat-GPT on Oct 7, 2023.

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