Documentary Collection

Documentary Collection is a method of payment between seller and buyer when both sides know each other well. The seller sends the shipping document to the buyer together with the payment instruction. It is so-called because the seller receives the payment from the buyer in exchange for some related document. This may occur through banking channel. The documentary collection (hereinafter appears as DC) is less complicated and cheaper than the letter of credit. If there is no well-established and long standing business relationship between buyer and seller, this process would be highly risky especially for the seller. This risk would decreases when two parties’ related banks are involved in the business. The buyer’s bank is responsible for making the payment and the seller’s bank for providing the shipping documents. The seller’s instruction which is a demand for the payment to the buyer is the main document in DC. The documentary collection goes into two groups depending on when the seller wants the payment to be made from the buyer’s side. These two groups go as follows:

1- Documents against payment in which the buyer is required to pay the amount at sight.
2- Documents against acceptance in which the buyer is required to pay on a specified date in future.

In the first above-said situation, the seller ships the goods and then gives the shipping document to his bank (known as remitting bank). The remitting bank forwards these document to buyers bank (known as collecting bank). The collecting bank presents the documents to the buyer when the buyer makes the payment for the goods. The collecting bank then remits the money received from the buyer to the seller’s bank for the payment to the seller.

In the second situation, the seller gives a period of time to the buyer through a time draft. Once the buyer signs the draft, which becomes a binding obligation to pay by the due date indicated in the draft, the documents are submitted to the buyer. The collecting bank contacts the buyer on the due date for the payment then after the payment is made on the due date, the amount is remitted to the seller’s bank for the payment to the seller. The seller’s risk is higher in the second situation as told because it has no control over the goods after the buyer’s acceptance and may not get paid for them.

Documentary collection is safer than an open account but is riskier than the letter of credit because the banks are not responsible for the payment and the apparent authenticity of the documents. Overall, because of their lower cost and simple process, DC is the best way to do the business when two parties (seller and buyer) know each other well and have good relationships.

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