Documentary collection is a means of ensuring that the goods are only handed over to the buyer when the amount shown on a bill of exchange is paid or when the customer accepts the bill as a contract to pay by a specified date. A bill of exchange is accepted by the customer putting his signature across it.
A bill of exchange is simply a written order to pay to someone on demand or at a fixed time in the future a certain sum of money. A bill is addressed by the exporter to the customer.
How it works:
In documentary collection the bank acts on the instructions of the exporter and the exchange of the documents to title, takes place at the customer’s place of business.
Once the exporter has dispatched his goods to the customer, the exporter collects the shipping documents, which give title to the goods. He ‘draws a bill of exchange on the buyer’.
Image Source: kotakmoneywatch.com
This merely means that he fills in a bill of exchange with all the relevant details relating to the particular shipment. This is made out to be payable either on sight (on demand) or within a specified time (for example 90 days).
The exporter sends the bills of exchange and the shipping documents to his bank, which forwards them to an advising bank in the customer’s country.
This bank, or the exporter’s agents in the country concerned, takes the documents to the customer. If it is a sight bill the customer pays the amount directly.
ADVERTISEMENTS:
If it is a time bill he signs the bills, which means he ‘accepts’ it for payment within a certain specified time (a time bill is sometimes called a term bill or usance bill). In return for either payment or acceptance, the customer is handed the shipping documents.
The customer now has authority to collect the goods, which may already have arrived at the port of destination. The customer’s bank pays the exporter for the goods.
If the bill of exchange is a sight bill and the money is actually paid when the bill is presented, this arrangement is known as document against payment (D/P). It is known as document against acceptance (D/A) when the bill of exchange is a time bill and the money is to be paid within a specified time.
Dishonored Bills:
An exporter takes a risk when he sells on the basis of documents against payment (D/P) or documents against acceptance (D/A). The customer can ‘dishonour’ the bill that is refuse to pay or to sign the bill. Although the exporter keeps title to the goods, he has the problem of what to do with them.
ADVERTISEMENTS:
Very little business is completely safe, and an exporter may have to take calculated risks. Even though the stability of a particular country may be doubtful, an exporter may decide to export to a customer in that country because of good long-term prospects or because of the need to penetrate a market quickly. These reasons could make certain risks worthwhile.