Documentary collection

What it means

Documentary collection is a payment method in international trade in which the bank releases the shipping and commercial documents for goods to the buyer only after payment or acceptance of a bill of exchange. Without the documents the buyer cannot take delivery or complete customs clearance.

There are two basic types: documents against payment, where the buyer must pay immediately, and documents against acceptance, where the buyer signs a bill payable in the future. The process follows the International Chamber of Commerce's uniform rules for collections.

It is cheaper and simpler than a letter of credit, but the bank does not guarantee payment. Banks only pass on documents and money, and if the buyer does not take up the documents, the seller is left with goods in a foreign country that must be sold elsewhere or shipped back.

How it works in practice

After shipping, the seller hands its bank the documents, such as the invoice, transport document, certificate of origin and insurance policy, together with a collection order. The bank forwards them to the buyer's bank, which releases them once the conditions are met and remits the money.

Collection suits partners the seller trusts to some degree but does not want to ship to on open account. Where the risk is higher, a letter of credit, a bank guarantee or trade credit insurance is better.

The documents must match the agreed Incoterms and the buyer country's requirements. A faulty document can delay delivery and trigger storage charges, so the list of documents should be agreed in the sales contract in advance.

What to watch out for

The buyer can refuse the documents for any reason, for example if the price of the goods has fallen in the meantime. The seller should have a plan for the goods and know who bears the cost of storage or return transport.

With documents against acceptance, once the documents are released the seller holds only the bill of exchange. Its value depends on the buyer's creditworthiness and on how easily the bill can be enforced in the buyer's country, so sellers sometimes ask for a bank guarantee of the bill.