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In our earlier post, we discussed how in open account and advance payment methods, the shipping documents are sent directly to the importer and the payment is also dealt between the exporter and the importer, without involving banks for payment collection.

In documentary collections, the banks enter the picture as agents. So, the exporter sends the goods to the importer, but instead of sending the shipping documents related to the trade directly to the importer, he submits the documents to his bank for collection of payment.

Parties in Documentary Collections

When it comes to international trade, the mechanisms involved in facilitating smooth transactions are diverse and complex. One such method that plays a pivotal role is documentary collections. Before delving into the step wise flow of collection bills, let's acquaint ourselves with the key players in this process.

Seller/Exporter/Principal/Drawer: At the heart of the collection process is the seller, often referred to as the exporter or principal. This entity not only initiates the transaction but, as the creator of the bill of exchange, is also known as the drawer.

Buyer/Importer/Drawee: On the other side of the transaction stands the buyer, alternatively known as the importer or drawee. This party holds the responsibility of fulfilling the payment outlined in the bill of exchange.

Exporter's Bank/Remitting Bank: The exporter's bank, often termed the remitting bank, takes charge of dispatching the collection documents. These documents are then sent to a bank situated in the importer's country.

Collecting Bank/Intermediate Bank: In scenarios where the remitting bank lacks a direct connection with the importer's bank, an intermediate institution steps in—the collecting bank. This bank acts as an intermediary, receiving the documents from the remitting bank and forwarding them to the importer's bank.

Importer's Bank/Presenting Bank: The next destination for the collection documents is the importer's bank, also known as the presenting or collecting bank. In many cases, collecting and presenting bank roles are assumed by the same bank.

Process Flow of Sight and Usance Documentary Collections

Now, let's delve into the step wise flow of collection bills, exploring the nuances of both 'Documents Against Payment' and 'Documents Against Acceptance.'

Steps 1 - 4

1. Contractual Agreement: The journey begins with a comprehensive agreement between the importer and exporter. This agreement covers details such as the type of goods, the chosen mode of transport, and a crucial decision—whether the payment will be immediate, known as 'Documents Against Payment' (D/P), or deferred to a specified period, termed 'Documents Against Acceptance' (D/A).
2. Role of Banks and Ports: The process involves the remitting bank and the collecting or presenting bank, as well as the relevant ports in the respective countries. Inland trade may entail different locations within the same country.
3. Export and Document Submission: The exporter prepares and dispatches the goods to the importer's country for export. Simultaneously, all documents related to the trade are meticulously prepared and submitted to the remitting bank for collections.
4. Common Steps for D/P and D/A: Up to this point, both D/P and D/A follow a common trajectory. Now, let's explore the distinctive paths each takes.

5. In the case of Documents Against Payment (D/P): The collecting or presenting bank promptly presents the documents to the importer for immediate payment—also known as 'At Sight' documents. The importer settles the payment, obtains the documents, and proceeds to claim the goods from the transport company. Subsequently, the collecting or presenting bank sends the payment to the importer's bank, and the remitting bank, in turn, transfers the payment to the exporter.

6. In the case of Documents Against Acceptance (D/A): Acceptance bills come with a predetermined payment period, such as '90 days from shipment' or '60 days from sight,' known as the Usance Period. The presenting bank presents the documents to the importer, who accepts the responsibility to pay after the Usance Period. The importer receives the document, claims the goods from the transport company, and the presenting bank notifies the bank through a swift or SFMS message about the accepted bill. Upon the due date, the importer settles the payment with his bank, and the presenting bank remits the payment to the remitting bank, facilitating the final payment to the exporter.
   

In summary, while Documents Against Payment offer a swift and immediate settlement, Documents Against Acceptance provide the importer with an extended payment period. This fundamental understanding of the collection process is crucial for navigating the complexities of international trade transactions, ensuring transparency, and fostering successful cross-border collaborations.

Now, let's learn how documentary credit works and how it is different from collections.

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Next:    Documentary Credit/ Letter of Credit in International Trade