# Methods of Payment/Documentary Collections

| Unit 4.1-Methods of Payment | Introduction | Cash in Advance | Documentary Collections | Letters of Credit | Open Account | Combining Methods | Summary | Resources | Activities | Assessment Go to Unit 4.1 | Unit 4.2 | Unit 4.3 | Unit 4.4 | Unit 4.5 | Unit 4.6 | Unit 4.7 | Unit 4.8 | Unit 4.9 Return to Trade Finance Module 4: Payment Methods |

## Documentary Collections

Using a documentary collection process requires that a seller ship the product and create a negotiable document, usually a draft or bill of exchange. The draft and shipping documents are then processed either through a buyer’s bank (the collecting bank) or through the seller and buyer’s banks. Upon arrival at the buyer’s bank, the buyer is notified to make payment; then the documents are released and used to clear the shipment through customs upon arrival.
The primary advantage of documentary collections is that a seller who extends credit terms to a buyer under a D/A collection obtains an enforceable debt instrument in the form of a trade acceptance. The seller’s rights to payment are protected under the negotiable instruments law of that buyer’s country. In the event this buyer defaults or delays payment at maturity, the possession of the trade acceptance may put the seller in a stronger position before the court than if he/she had sold under open account, in which evidence of indebtedness is provided by the unpaid commercial invoice alone. In addition, a bank presenting a collection on behalf of a seller may obtain prompt payment from a buyer who might be inclined to delay payment if the seller were invoicing under open account.
A documentary collection is best used for ocean shipments where original bills of lading are required. An original bill of lading is a document of title which enables a buyer to gain possession of the goods. When all the originals of a bill of lading are sent to the collecting bank, it is in the interest of the buyer to effect payment in order to obtain title to the goods.
Documentary collections may be more competitive than letter of credit terms because they are less costly and do not require the buyer to tie up his/her local bank credit lines.
There are a variety of terms associated with documentary collections that should be understood:
* Buyer = Importer
* Seller = Exporter
* Remitting Bank = Exporter’s Bank >> receives payment
* Collecting Bank = Importer’s Bank >> transmits funds from buyer to seller
* Bill of Exchange/Draft – document issued by exporter and used for remittance of funds
* Time/Usance Bill of Exchange – tenured at 30, 60, 90, 120 or 180 days, etc.
There are four types of processes available to buyers and sellers: 1. D/P – Documents against Payment 2. D/A – Documents against Acceptance 3. Clean Collection 4. Cash Against Documents

### D/P – Documents against Payment

The export documents and the bill of exchange provided to a collecting bank are only made available to an importer when payment is made. The collecting bank then transfers the funds to the seller through the remitting bank.

### D/A – Documents against Acceptance

The export documents and a time/usance bill of exchange are sent to a remitting bank. The documents are then sent to a collecting bank with instructions to release the documents against a buyer’s acceptance of the bill of exchange.

### Clean Collection

The exporter creates a bill of exchange, which is sent without any export documents to a buyer for collection through the remitting bank to the collecting bank. There is less security for an exporter since the documents are sent directly to the importer.

### Cash Against Documents

This process lacks the security and legal protection of a documentary collection since the exports documents are sent through a remitting bank to a collection bank without a bill of exchange. It is, however, still a collection through the banking system.
| Time of Payment | *Either at sight of documents or acceptance as agreed to by the parties (30, 60, 90 days after acceptance). |
| Goods Available to Buyer | *Upon arrival of goods after payment or acceptance of draft has been made. Risks to Seller *Buyer defaults on payment obligation. *Delays in availability of foreign exchange and transferring of funds from buyer’s country. *Payment blocked due to political events in buyer’s country. Risks to Buyer *Seller does not ship per the order (quantity, product, quality, shipping method). *Seller does not ship when requested, either early or late. |
| When Appropriate to Quote or Use | *Seller and buyer have done some business together and are transitioning away from a prepayment policy. *Seller has some trust that buyer will accept shipment and pay at agreed time. *Seller is confident that importing country will not impose regulations deferring or blocking transfer of payment. *Seller has sufficient liquidity or access to outside financing to extend deferred payment terms. |
| Financing | *Seller finances buyer through deferred payment terms. *Seller can use trade acceptances, which are negotiable instruments, to obtain financing. *Leverage /or financing comes from domestic/global business. |