CandleFocus Glossary Editor
Documentary collection is a popular method of trade finance – it is used by many businesses to secure transactions between companies. It is an effective way of protecting both the exporter and importer as it involves banks, which act as guarantors.
Essentially, when an exporter and importer enter into a transaction, the exporter’s bank will forward the relevant documents to the importer’s bank. The documents include shipping invoices, bills of lading, insurance coverage and any other relevant paperwork. Once the documents are received, the importer’s bank will release the payment to the exporter’s bank, with the understanding that if the goods are not as promised, then the importer can make a claim for a refund.
The terms of a document collection involve a draft drawn on the importer, which contains details of the goods, such as the type, quantity and quality. There are two types of drafts – documents against payment and documents against acceptance. The documents against payment require the importer to pay when the documents are presented, while documents against acceptance require payment by a specified date.
In terms of risk for both the exporter and importer, documentary collection is generally preferable to open account trading and advance payment of money. This is particularly true in countries with weak enforcement of contracts, which can mean that all the risks associated with the transaction are assumed by the importer in the case of open account trading and advance payment of money. By involving the banks, documentary collection offers more protection as the importer’s bank will guarantee payment as long as the documents are valid.
Documentary collection is a popular and effective way of protecting exporters and importers in international trade. It covers the cost of goods and involves the banks, which provide an added layer of security and protection. Even in countries with weak enforcement of contracts, documentary collection can provide a more reliable and secure way of conducting global trade.
Essentially, when an exporter and importer enter into a transaction, the exporter’s bank will forward the relevant documents to the importer’s bank. The documents include shipping invoices, bills of lading, insurance coverage and any other relevant paperwork. Once the documents are received, the importer’s bank will release the payment to the exporter’s bank, with the understanding that if the goods are not as promised, then the importer can make a claim for a refund.
The terms of a document collection involve a draft drawn on the importer, which contains details of the goods, such as the type, quantity and quality. There are two types of drafts – documents against payment and documents against acceptance. The documents against payment require the importer to pay when the documents are presented, while documents against acceptance require payment by a specified date.
In terms of risk for both the exporter and importer, documentary collection is generally preferable to open account trading and advance payment of money. This is particularly true in countries with weak enforcement of contracts, which can mean that all the risks associated with the transaction are assumed by the importer in the case of open account trading and advance payment of money. By involving the banks, documentary collection offers more protection as the importer’s bank will guarantee payment as long as the documents are valid.
Documentary collection is a popular and effective way of protecting exporters and importers in international trade. It covers the cost of goods and involves the banks, which provide an added layer of security and protection. Even in countries with weak enforcement of contracts, documentary collection can provide a more reliable and secure way of conducting global trade.