Documentary Collection

A documentary collection is a method of payment in international trade in which the exporter's bank sends shipping and commercial documents to a bank in the importer's country, with instructions to release them to the importer only against payment or against acceptance of a bill of exchange (a draft). Because the documents usually include the bill of lading, the importer cannot take the goods without first paying or committing to pay.

The banks act as intermediaries for the documents, not as guarantors. Unlike an issuing bank under a letter of credit, a bank handling a collection has no obligation to pay if the buyer refuses, which makes collections cheaper but riskier for the seller.

• Principal — the exporter, who entrusts the documents to its bank.
• Remitting bank — the exporter's bank, which sends the documents with a collection instruction.
• Collecting bank — any bank other than the remitting bank involved in processing the collection, often a correspondent bank.
• Presenting bank — the collecting bank that presents the documents to the importer.
• Drawee — the importer, to whom the documents are presented.

After shipping the goods, the exporter gathers the documents, typically a commercial invoice, the bill of lading, a packing list, an insurance certificate and any certificates of origin or inspection, and hands them to the remitting bank with a draft. The remitting bank forwards them to the presenting bank in the importer's country. The presenting bank notifies the importer and releases the documents according to one of two instructions:

• Documents against payment (D/P) — the importer pays the sight draft, and the bank then releases the documents. Payment proceeds flow back through the bank chain to the exporter.
• Documents against acceptance (D/A) — the importer accepts a time (usance) draft, promising to pay on a future date, for example 60 or 90 days after sight, and receives the documents immediately. The exporter then holds an accepted bill of exchange, which it can keep or discount for early cash.

The exporter can strengthen a D/A collection by asking for the accepted draft to be guaranteed (avalized) by the importer's bank, which turns the importer's promise into a bank obligation.

Most collections are subject to the Uniform Rules for Collections, ICC Publication No. 522 (URC 522), issued by the International Chamber of Commerce and in effect since 1996. The rules define the duties of the banks, which must act in good faith and with reasonable care and must check that the documents received appear to match those listed in the collection instruction. Banks are not obliged to examine the documents' contents in the way they must under a letter of credit, and they are not responsible for the goods. The rules also cover protest, presentation and the handling of charges.

A documentary collection sits between open-account trade, which is best for the buyer, and cash in advance, which is best for the seller. Under D/P the exporter keeps control of the goods through the document of title until it is paid; the main risk is that the buyer refuses the documents, leaving the exporter with goods at a foreign port, incurring storage and demurrage and needing to find another buyer or ship them home. Under D/A, once the documents are released, the exporter relies on the importer honoring the accepted draft.

Collections suit established relationships, stable markets and situations where the exporter trusts the buyer but wants some control. Country risk matters too: in markets with capital controls, a buyer may pay in local currency while foreign exchange for transfer is delayed. Exporters often agree a collection as part of broader supplier-payment terms.

Banks handling collections screen the parties, vessels and ports against sanctions lists and look for signs of trade-based money laundering, such as prices out of line with the market or goods inconsistent with the parties' business. Because the bank sees the underlying documents, collections give it more information than a plain open-account transfer, which can help with trade-payment compliance and, in some countries, with satisfying export proceeds repatriation rules.

• International Chamber of Commerce