As an exporter, Documentary Collection offers you far greater security than selling on open account, but not as much as a documentary credit. Credit, political and transfer risks, for instance, are not covered. You should therefore check before starting sales negotiations whether documentary collection is the right method of payment for you as an exporter.
Documentary collection costs less, involves less time and effort for settlement and it is straightforward. Payment is usually quicker than with open account. The documents and thus the goods can be released to the importer simultaneously on payment of the amount owed or acceptance of a draft. This applies where the goods are not addressed directly to the importer in the shipping document or the latter cannot redeem them without the shipping documents. Clear internationally recognized guidelines in the Uniform Rules for Collections (URC), ICC publication no. 522 are bonus of documentary collection method.
However, Payment is not guaranteed as credit, political and transfer risks are not covered. The payment date is unsure. If the importer refuses to accept the documents or the draft on the due date, losses can be incurred. It may prove extremely costly or even impossible to find an alternative buyer or have the goods shipped back. The Bank’s liability is limited to the forwarding and release of documents against payment, acceptance or promise of payment (letter of undertaking) by the importer.
Documents against Payment (D/P) or Cash against Documents (C.A.D.)
The presenting bank may only release the documents simultaneously against immediate payment.
Documents against Acceptance (D/A)
The presenting bank may only release the documents against acceptance of a draft by the importer. The importer takes possession of the merchandise before payment is made. The advantage of this is that he can re-sell the goods immediately, thereby raising the necessary funds to pay the draft on the due date. The exporter thus grants the importer a period of credit and in return receives a draft accepted by the drawee. As this is all he can rely on until the draft matures, the principal bears the risk of non-payment. If the exporter requires greater security, he can request a guarantee or surety from a prime bank. However, he must ensure that this is contractually covered and request advance confirmation from the guarantor bank.
In foreign trade, bills of exchange and promissory notes are frequently used financial documents which evidence a debtor-creditor relationship. Sometimes, beneficiary of a promissory note or a bill of exchange needs extra security for collection. In this regard, banks play an important role. If a bank signs a bill of exchange or promissory note in favor of the creditor it is called avalization. Having added an aval, a bank undertakes to pay the sum of the related financial document to the creditor on the due date. Bank-avalized financial documents are easily accepted by credit institutions and can be discounted at a certain rate before their maturity dates. Avalized financial documents are highly liquid instruments and reliable tools for international traders.