Lesson 4: Documentary Collections
Welcome to the fourth lesson of Module 3. In this lesson, we'll explore Documentary Collections, an important method of payment in international trade.
What is a Documentary Collection?
A Documentary Collection is a method of payment in international trade where the exporter instructs their bank to forward documents related to the export of goods to the importer's bank. The importer's bank releases these documents to the importer only upon payment or acceptance of a bill of exchange.
The Documentary Collection Process
Types of Documentary Collections
- Documents Against Payment (D/P): The importer must pay the face amount of the draft at sight to obtain the documents.
- Documents Against Acceptance (D/A): The importer accepts the draft (promising to pay at a future date) to obtain the documents.
Key Documents in Documentary Collections
- Bill of Exchange (Draft)
- Bill of Lading
- Commercial Invoice
- Insurance Certificate
- Certificate of Origin
- Packing List
Advantages of Documentary Collections
- Simpler and less expensive than Letters of Credit
- Offers some protection to both exporter and importer
- Allows for deferred payment (in case of D/A)
- Bank involvement adds a level of security
Disadvantages and Risks
- No guarantee of payment for the exporter
- Importer can refuse to accept the documents and goods
- Exporter retains title to goods until payment, but goods may have already been shipped
- Banks' role is limited to facilitating the exchange of documents for payment
Example Scenario
A Brazilian coffee exporter agrees to sell 1000 kg of coffee beans to a Canadian importer for $10,000. The exporter ships the coffee and presents the shipping documents to their bank. The bank forwards these documents to the importer's bank in Canada. The Canadian bank informs the importer, who then pays $10,000 to receive the documents and clear the shipment. The payment is then transferred back through the banking chain to the Brazilian exporter.
Comparison: Documentary Collection vs. Letter of Credit
| Feature | Documentary Collection | Letter of Credit |
|---|---|---|
| Bank's role | Facilitate document exchange | Guarantee payment |
| Payment guarantee | No | Yes |
| Cost | Lower | Higher |
| Complexity | Simpler | More complex |
| Risk for exporter | Higher | Lower |
Key Points to Remember:
- Documentary Collections offer a balance between open account and letter of credit transactions.
- Banks act as facilitators but do not guarantee payment.
- D/P requires immediate payment, while D/A allows for deferred payment.
- This method is suitable for established trading relationships with some level of trust.
Test Your Knowledge: Documentary Collections
Ready to check your understanding of Documentary Collections? Take this quick quiz!