Collection / Documentary collection / Collection is an order by which the seller instructs his bank to deliver the presented documents to his buyer through the buyer’s bank, with the condition that they are paid or that a bill of exchange drawn on him is accepted.
Collection is contracted as a form of payment in a situation when the seller and the buyer know each other and when the seller (exporter) is convinced that the buyer is a very reliable person and that his solvency and willingness to pay for the contracted goods are unquestionable.
The advantages of using documentary collection are as follows:
a simple and inexpensive way to handle documents
payment takes place faster than with open payment
protection of the ownership of goods and the possibility of disposing of them, which is incomparably more favorable than in the case of open delivery of goods.
Three forms of documentary collection are known in business practice. When concluding the contract, the buyer and the seller agree that the payment for goods or services shall be made:
Cash Against Documents (CAD) With a CAD arrangement, the exporter’s commercial and shipping documents will be sent to the importer’s bank and delivered to the importer only when the funds are collected. Therefore, the importer cannot take over the goods from the carrier until the payment is made.
Documents against payment (D/P) As with a CAD transaction, the exporter’s commercial and shipping documents are sent through the importer’s bank for collection of funds. In addition to the export documents, the exporter submits a bill of exchange that is payable “at sight”.
Documents against acceptance (D/A) Importers are offered a deferral of payment, provided they are willing to accept a bill of exchange drawn on them by exporters within a specified period, at some future time that is fixed. By accepting the bill of exchange, the importer legally acknowledges the debt. Acceptance is achieved when the importer places his signature on the face of the bill of exchange.
Debt collection is regulated by the rules prescribed by the International Chamber of Commerce in Paris (URC 522).
After the shipping documents are collected as proof of the completed shipment of the goods, they serve the exporter to charge for the goods. The entire process of documentary collection could be divided into three phases:
Issuance of a collection order (collection instruction) by the exporter
Forwarding the collection order with all necessary documents to the Bank
Redemption of documents at the buyer’s bank.
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