What 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 your customer.
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 relationship with.