Apart from the direct payment in export/import, a third party (bank) can also be involved to mitigate the risks involved in the transaction. This type of payment is known as 'Documentary Collection'. Here, the exporter entrusts the collection of payment to the exporter’s bank (remitting bank), which sends documents to the importer’s bank (collecting bank), along with instructions and details for the payment.
Under this payment term, 'Documentary Collection' (D/C), funds are received from the importer and remitted to the exporter through the banks in exchange for related documents. It involves 'bill of exchange', that requires the importer to pay the face amount either at sight (document against payment [D/P] or cash against documents) or on a specified future date (document against acceptance [D/A] or cash against acceptance). The collection cover letter gives instructions that specify the documents required for the delivery of the goods to the importer.
What are the benefits of 'Documentary Collection'?
D/Cs are less complicated and less expensive than the Letter of Credit (L/C).
The exporter retains control over the goods until the importer either pays the draft amount at sight or accepts the draft to incur a legal obligation to pay at a specified later date, hence, less risky.
Bank assistance in obtaining payment.
The process is simple and fast.
What are the disadvantages of 'Documentary Collection'?
Banks’ role is limited and they do not guarantee payment.
Banks do not verify the accuracy of the documents.
Under a D/C transaction, the importer is not obligated to pay for goods before shipment.
What is the flow of transactions under D/C Terms?
Shipment of goods by the exporter.
Receiving documents like shipment bills.
Presenting the documents to the home bank along with the draft(instructions).
The home bank sends the documents to the importer's bank.
The importer's bank releases the documents like shipment bills to the importer in exchange for payment.
Payment is transferred by the importer's bank to the home bank.
Payment is credited to the exporter's account.
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Author: Sachin Yadav Co-Author: Lisa Goel