are documentary collections?
Documentary collections allow you to keep
control of the goods and to raise additional finance as
a result. How documentary collections work is that an
overseas bank, acting on your bank's behalf, will only
release the documents necessary for your customer (i.e.
the importer) to take possession of the goods once they
formally accept the terms of a bill of exchange. In accepting
the bill of exchange, the customer essentially pays the
overseas bank (i.e. they essentially "buy" the
bill of exchange from the bank).
Bills of Exchange
A bill of exchange is a written document
in which 'the drawer' requires 'the drawee' to pay a specified
amount. The drawer is yourself, while the drawee is usually
If a bill is being used with a term letter of credit,
the drawee is usually the customer's bank. The bill will
also specify when payment should be made. The bill can
either request immediate payment ('at sight' or 'on demand'),
or it can specify payment at a later date ("the term"),
e.g. 30 days after sight. The terms of the contract usually
require your customer to accept the bill immediately if
it is for later payment. New exporters may find that their
bank is not initially willing to provide them with term
bills. Drawees become legally liable for payment once
they 'accept' (agree to pay) the bill. A bill is often
referred to as a "draft" until it has been accepted.
'Negotiable' bills specify payment 'to the order of' the
drawer. This allows you to negotiate the bill, ie to sell
it to another party (usually your bank) to raise finance.
Should the bill of exchange not be accepted
by the customer, you will still have ownership and control
of the goods, but in your customer's country. There is
also a risk that you may not receive payment, unless the
bill has been guaranteed by the bank ("avalised").
You will have a strong basis for pursuing legal action
against the customer but in the foreign country.
The bill of exchange can specify any credit
period that you negotiate with your customer. For example,
you can specify immediate payment, payment after a set
number of days, or payment by a given date. Once the bill
has been accepted, you can use the bill of exchange to
raise additional finance.
You should be aware that in the case
of a bill of exchange, both your bank and the overseas
bank will charge a commission. Your terms of trade with
your customer must specify who is responsible for paying
these charges. Documentary collections are typically
used for exports to customers you have an established