What is Documentary Collection?
Documentary Collection (D/C) is a payment method in international trade.
Documentary collection is a process that allows a seller to give their bank instructions to forward trade-related documents to the bank of a buyer. The instructions are normally accompanied by a request for the documentation to be presented to the buyer for payment.
The request and instructions include the terms and conditions that state when the documents can be availed to the buyer.
Documentary Collection Process:
The process begins with a buyer making an order or a purchase of goods. The exporter[Drawer] or seller then makes arrangements to send the goods to the buyer or importer. The seller submits a collection order to his or her bank[Remitting Bank]. The seller’s bank then submits the collection order to the bank of the buyer[Collecting/Presenting Bank].
The buyer’s bank presents a 'presentation document' to the buyer[Drawee], who then must make a payment or acceptance to his or her bank. The payment or acceptance is sent to the seller’s bank by the buyer’s bank, and the seller’s bank submits this payment or acceptance to the seller.
Documents Against Payment Collection:
A document against payment collection is initiated with the exporter shipping goods to a buyer. The seller or exporter supplies their bank with the shipping (and other relevant) documentation, which then forwards the documents to the importer or buyer’s bank.
The bank can only avail the documents to the buyer once the payment has been made and finalized. After payment completion, the buyer’s bank (also known as the collecting bank) transfers the funds to the bank of the exporter, who then transmits the funds to the exporter/seller.
Documents Against Acceptance Collection:
The exporter or seller provides a credit arrangement to the buyer. The extension of credit is done through a time draft, which means that the documents related to the sale of goods are availed to the buyer or importer once he or she has accepted and signed the time draft.
Time draft – > A bill of exchange that allows for a buyer to make payment at a later stage and legally binds the buyer to make the payment on a specified date.
Documents may be released only if the importer accepts the accompanying draft, thereby incurring an obligation to pay at a specified future date.
When the specified date is reached, the collecting bank reaches out to the buyer for payment. Once the payment has been made, the buyer’s bank also known as the collecting bank transfers the funds to the bank of the exporter, who then transmits the funds to the exporter/seller.