At the outset of a business relationship, Exporters usually avoid to operate on an open-account basis since the risk of nonpayment is very high. In much the same way, Importers are reluctant to pay before the delivery especially when they are dealing with unknown exporters.
Luckily, the documentary collection is a payment method that addresses precisely those concerns and represents an alternative to the letter of credit (for an explanation of letter of credit click here), which can be perceived as too burdensome due to its high level of formalism.
In fact in 1956, the International Chamber of commerce has developed a set of rules known as “the Uniform rules for collection” (URC), which determines precisely the process that the documentary collection must follow.
Overtime, the URC’s have been revised several times up until the last version, the URC 522 that have been release in June 1995.
The figure below depict the different steps of the documentary collection process
At first, the buyer and the seller conclude a deal, where the ordered goods are determined in detail (nature, quality, quantity etc.). Given that the seller wants to be sure that he will be paid, the documentary collection payment method has been selected and will unfold as follows:
The Seller organises the transport of the goods, however he establishes all the documents necessary for claiming the goods under the name of the “collecting bank” located in the buyers’ country.
Note that the collecting bank can be designated as the consignee (with the agreement of the collecting bank). By doing so, the seller makes sure that the buyer won’t be able to take ownership of the goods unless the payment is made. Alternatively, the goods can be shipped to a bonded ware (for instance) until payment is made.
The Seller gives all the documents (transport documents, invoice, certificate of origin etc.), as well as a list of instructions to his local bank “the remitting bank” which will handle the whole process and forward them to the collecting bank.
The collecting bank releases the documents to the Importer against payment, which can take several forms:
Documents against Payment:
In this case, the Importer must pay the full amount at the time of the collection of the documents required for claiming the goods.
Documents against acceptance:
When the Exporter enabled the Importer to pay at later date, the buyer can against acceptance of a time draft (also known as bill of exchange) take delivery of the goods in the bonded warehouse (for instance) and organise the import clearance.
The collecting bank transfer the amount of the transaction to the remitting bank or the bill of exchange depending on payment terms agreed
The Exporter’s bank account is credited accordingly.
A noticeable advantage of this payment method is its relative simplicity as it is much less formalistic than the letter of credit. Moreover, one of the strength of this payment method is the fact that it is less costly.
However, it must be stressed that behind this ease of use, the documentary collection is nonetheless characterised by a high level of risk.
First of all, the role of the remitting bank and the collecting bank is limited as they are only required to assist and arrange the collection of the documents, but they have limited obligations toward the parties involved.
Indeed, the Importer might neither collect the documents nor pay the goods meaning that in this case, the Seller will have to either ship the goods back to his country or to sell them locally at disadvantageous conditions.
Furthermore, when it has been agreed that the payment will be deferred with the acceptance of a bill of exchange (draft), the non-payment risk remains uncovered since the remitting and collecting bank have no obligation toward the Exporter.
This is why this payment method is recommended with buyers with whom an established relationship based on trust already exists.
In this presentation we have developed the logic behind the documentary collection process however we would like to stress that professionals willing to use this method cannot rely exclusively on this website (or any other website). We strongly recommend that you refer to full set of rules of the URC 522 issued by the International Chamber of commerce in order to check for yourself, the full extent of your obligations while using this payment method.
(Note that the explanation of the 26 articles included within the URC 522 will be developed soon)