A documentary collection is
usually, but need not be, subject to a set of rules governed by the ICC, known
as the ICC Uniform Rules for Collections, Publication No. 522 (or URC 522 for
A collection can be defined as
- "The delivery of a draft,
promissory note or cheque and/or documents by a bank to a third party (i.e., an
importer), on behalf of the exporter, against fulfilment of certain conditions
i.e., payment, acceptance or another specified consideration."
For the exporter, it bridges the gap between open account
and documentary credits by providing a potentially higher level of security
than open account, through the control of the documents by banks, without the
often onerous terms and conditions of a documentary credit.
For importers and exporters, a
documentary collection attracts cheaper bank costs than those associated with a
Requires a certain trust in the importer
i.e., their standing and financial position.
No previous adverse experiences i.e.,
payment delays, non-payment.
Importer should be located in a politically
There is a possibility to retain control of
the goods via documents of title i.e., bills of lading
o rconsignments to a bank (with prior agreement).
There must be an understanding that one of the
parties will take out necessary insurance cover for the transit of the
Importer/Buyer Risk (Credit Risk) - e.g., an
importer may not pay for the goods due to insolvency or willful default.
Country Risk - e.g., an importer may be more
than willing to pay for goods received but its Government may introduce laws
(i.e., exchange controls), which prevent payment being made.
Transit Risk - e.g., the need to insure risks
for the movement of goods including damage, loss and theft, loss and/or damage.
Types of collection:
Clean Collection: A collection instruction
containing only a financial document.
Documentary Collection: A collection instruction
containing commercial documents that may be accompanied by a financial
D/P (Documents against Payment): Documents are
to be released upon payment by the importer.
D/A (Documents against Acceptance): Documents
are to be released upon the importer accepting a draft drawn on it. Payment of
the draft at maturity is subject to the importer authorising payment at that
time. With the growing use of deferred payment as an alternative to the
acceptance of a draft, D/A can also refer to the release of documents upon the
importer undertaking to pay on a specified due date.
Financial: A description given to bills of
exchange (drafts), promissory notes, cheques, etc.
Commercial: A description given to shipping
documents such as invoices, transport documents, insurance documents, etc.
Prior to the importer and exporter agreeing on
settlement by documentary collection, the exporter needs to ensure that it has
a banking infrastructure in place in order to facilitate such a transaction.
For example, there will need to be an existing
banking relationship between the exporter and the remitting bank.
Obviously this will require the remitting bank completing its usual KYC
(Know Your Customer)
More information can be found in the Documentary Collections
modules at www.tradefinance.training