How can it help me?
Documentary collection involves you shipping your goods and your buyer paying for those goods later. It can make your export contract attractive to a buyer, as this payment method carries a relatively low level of risk for them.
What is it?
A payment method in which you ship the goods before payment but retain control of them until you receive payment from your overseas buyer or receive a legal undertaking of future payment, such as an endorsed (signed) bill of exchange (also called a draft) or promissory note.
Documentary collection is a widely used payment method in the international trade of goods. Both your bank and your buyer’s bank facilitate payment.
How does it work?
The main steps are:
- After you’ve finalised the export contract and agreed the terms of the documentary collection, you ship the goods to your buyer.
- You lodge the bill of exchange (which your bank can help prepare) and relevant shipping documents with your bank (the remitting bank). These documents include the documents of title, a commercial invoice, an insurance policy and regulatory documents. You also submit your instructions for handling the documentary collection.
- The remitting bank forwards the bill of exchange, shipping documents and your instructions to your buyer’s bank (the collecting or presenting bank).
- The collecting bank presents the bill of exchange to your buyer for their acceptance.
- If the payment terms of your contract are ‘at sight’, your buyer accepts the bill of exchange by signing it and pays the collecting bank. In return, the buyer receives the shipping documents, including the documents of title, allowing them to clear the goods. This is known as sight draft/documents against payment (SD/DP).
Alternatively, the bill of exchange might state a future date at which your buyer must pay, for example 30, 60, 90 or 180 days after sight (the time required for payment is called the tenor of the bill). By signing the bill of exchange, the buyer undertakes to pay on the due date. In return, your buyer receives the shipping documents, allowing them to clear the goods. This is known as documents against acceptance (DA).
- Once the collecting bank receives payment from your buyer, either at sight or at the end of the tenor, it transfers the funds to the remitting bank for final payment to you.
The diagram below shows the main steps in a transaction involving payment by documentary collection.
Notes to diagram
- You enter into an export contract with your overseas buyer.
- You ship the goods to your buyer in accordance with the contract.
- You provide the bill of exchange and shipping documents (including the documents of title) to your bank.
- Your bank forwards the bill of exchange and shipping documents to the buyer’s bank.
- The buyer’s bank presents the bill of exchange to the buyer. The buyer accepts the bill of exchange by signing it and receives the shipping documents from their bank, allowing them to clear the goods.
- The buyer pays their bank for the goods, either at sight or after the credit period stated in the bill of exchange.
- The buyer’s bank transfers the payment to your bank.
- Your bank pays you.
How risky is it?
A range of payment methods is used in international trade, with payment taking place at a different stage of the export transaction in each. In general, this means that each method has a different level of non-payment risk for you, the exporter, and non-delivery risk for your buyer.
The diagram below illustrates the risk of documentary collection compared with other payment methods.
What are the pros and cons?
| Pros |
Cons |
| May increase your market competitiveness, as this payment method is relatively low risk for overseas buyers and may also help their cash flow |
Your risk of non-payment after delivery of your goods may be greater than in some other payment methods. If your bill of exchange specifies payment at a date after delivery, you hand over control of the goods but run the risk of non-payment on the due date |
| A simpler, faster and cheaper method of payment than a documentary credit |
The banks don’t verify the shipping documents or guarantee payment by your buyer. However, your buyer’s bank may add its ‘aval’ (guarantee) in relation to the bill of exchange |
| You retain title to the goods until your buyer accepts the bill of exchange |
May strain your cash flow, especially if the bill of exchange provides for extended credit terms. However, to help you finance the export order, your bank may agree to pay you the value of the bill of exchange (minus bank fees and interest) before it’s honoured by your buyer (see foreign bill negotiation) |
| If your buyer fails to honour the bill of exchange (and so doesn’t pay you), you can take legal action against them in accordance with laws governing the bill of exchange |
If your buyer doesn’t accept the bill of exchange, or delays or defaults on payment, you may incur unplanned expenses such as storing, disposing of or redirecting the goods |
| |
If the export contract is in a foreign currency, you are exposed to exchange rate risk from the date of the sale contract to the time of payment |
What costs are involved?
Banks charge fees for their services when facilitating a documentary collection. You and your buyer will agree who will pay which charges and advise your bank. Generally, banks charge less for a documentary collection than for a documentary credit transaction.
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