Collections

Collections

The exporter ships the goods and presents its bank with the shipping documents and instructions to seek payment.

Collections

Documentary collection (D/C), sometimes referred to by banks simply as collections, is a simpler, less expensive process than an L/C but it is riskier for the seller as the bank only facilitates the transactions and does not guarantee payment.

The exporter ships the goods and presents its bank with the shipping documents and instructions to seek payment. The exporter’s remitting bank presents these documents to the importer’s collecting bank.

Documents may be released by the collecting bank to the importer in two ways:

  • Documents against payment (D/P) or cash against documents (CAD) collection, where the documents are only released to the importer when is makes the payment to the collecting bank.  As with L/Cs, payment under D/P may be at sight or after a specified time after sight or shipment date.
  • Documents against acceptance (D/A) collection, where the exporters extends credit to the importer by providing them with a time draft (bill of exchange). The documents are released to the importer when it confirms acceptance of the time draft and it commits to make payment after a specified time.

The collecting bank then forwards the proceeds to the exporter’s remitting bank, which credits the exporter’s account.

D/Cs are typically used when the trading partners have a well-established relationship and an L/C is unacceptable to the buyer.

The simplest form of collection is a clean collection, in which the exporter despatches both the goods and the related documents to the buyer and sends the bill of exchange to its bank for the value of the goods sold, requesting payment.