A documentary collection requires no credit facility.
The seller (principal, drawer) submits the documents accompanied by the instructions for the release of the documents to the remitting bank. In other words, once he has supplied the goods ordered to a carrier in exchange for shipping documents (or once he has supplied the services requested) and he is in possession of all the documents prescribed by the contract, the seller can submit a documentary collection (instructions + documents) to his bank.
Seller’s bank is acting upon the received instructions will then send the documentary collection to the presenting bank.
The presenting bank checks whether the documents received correspond with the collection instructions regarding type and quantity. However, no detailed check of the content of the documents is performed, except for compliance reasons. If documents are missing or if the instructions are incomplete or ambiguous, sellerr’s bank is to be notified of it immediately.
If the documentary collection received appears to be in order, the presenting bank notifies the buyer that the documents are available for collection. If the buyer refuses the documents, then his bank notifies seller’s bank immediately, keeps the documents available and awaits further instructions. If the buyer pays (or accepts the bill of exchange if so requested), then he receives the documents in exchange.
The seller receives the payment through his bank:
- Where instructions are to release Documents Against Payment: Seller’s bank credits his account as soon as it receives the funds (from the presenting bank).
- Where instructions are to release Documents Against Acceptance: notice of acceptance of the bill of exchange is given, but the bill of exchange itself remains with the presenting bank (unless otherwise instructed as per the collection instructions). The presenting bank will submit the bill of exchange on due date to obtain drawee’s (buyer’s) payment. Another option is that the seller receives the accepted bill of exchange and possibly will have it discounted.
Some points of attention for the seller-supplier:
- A Documentary collection is suitable if the seller has no doubt about the buyer’s ability to meet his payment obligations and if the buyer’s country is politically and economically stable. Trade restrictions between the concerned countries should be carefully checked.
- In order for the documentary collection to provide the principal with some security to obtain payment, it is understood that the buyer should not be able to take possession of the goods without having accepted or paid the documentary collection. Indeed, there is less interest of using documentary collection when the Incoterms is Ex Works or when the goods are shipped by truck and delivered at the buyer’s warehouse.
- A documentary collection will offer a limited protection against non-payment, since the goods have already been produced and dispatched to the buyer without first securing the payment of the goods. A documentary collection does not cover the risk of non-payment of the documents or failure to honour the draft or letter of undertaking at maturity.
- Should the buyer fail to honour its obligations in this respect, it can often prove difficult to enforce the payment.
- Payment may be delayed due to exchange control regulations in the buyer’s country.