Documentary Collections Part 2-a

Further to my last blog, we will now see the 2 main types of Documentary Collections that are most commonly used….

1. Documents against Payment (DP), also commonly known in the business community as, Cash against Documents (CAD), however the term used in URC 522, is DP.
2. Documents against Acceptance (DA)

Generally the buyers and sellers draw a sales contract or more commonly cover the method of trade settlement on a Purchase order or a Pro-forma invoice, which has to be accepted by both the parties.

Documents against Payment (DP) / Cash against Documents (CAD)

DP/CAD, simply put means that the drawee/buyer/importer has to pay cash upfront to the Presenting/ Collecting bank to get the documents. The main document, amongst others, that would concern the drawee, would be the transport documents, especially if it is a document of title like a Ocean Bill of Lading, or even a shippers copy of a Airway Bill, both of which would serve as a must have document to collect the consignment from the seaport/ airport.

The arrangement of sending documents on DP/CAD basis is a pre-decided arrangement between the drawee/buyer/importer and the drawer/seller/exporter. This means that the drawer is not allowing any credit terms to the drawee and expects payment to be made by the drawee upfront, which is, prior to collecting the documents from the bank.

In line with my previous blogs, this would generally be when its a sellers market, and the seller is dictating payment terms, based on their monopoly on the goods.

Advantages/Disadvantages for the Buyer/drawee

1. Unlike Advance payment/ Open account trade settlement, the documents under collections are sent via banks on either side, thereby leaving a trace of the transaction, in case of disputes of the goods, between both the parties. However, it is important to note that the banks on either side do not have any payment obligation whatsoever in the transaction. Based on this trace, the buyer/drawee, can go for any litigations / legal cases etc, in case of commercial disputes.
2. There is no credit period that the buyer gets from the seller for the purchase of the goods.
3. The buyers/drawees can avail financing via import loans (I will cover in my future blogs) from their banks, also via Trust receipts, in some parts of the world, as the payment is to be made upfront to the seller/drawer. Since the documents are routed through the banks, it gives visibility to the bank, in terms of the trading activity, thereby enabling to take faster credit decisions for import loans.
4. Since Documentary collections, involves banking services, in terms of handling documents, this method of trade settlement is expensive as compared to Open account or Advance payment.

Advantages/Disadvantages for the Seller/drawee

1. Like the buyer/drawee, the seller also in keen on ensuring that the goods shipped by them are collected in a timely manner, and payment made upfront for the goods….documentary collections offers just that, as the Presenting/Collecting bank ensures that the buyer is notified of the arrival of the documents, and sends reminders for collection of documents and payment. Unknowingly, this also creates a history for the buyer/drawee, based on the periodicity of document refusal/ delay of collection caused because of any intentional reasons by the buyer. If the goods are market driven commodities, on some occasions the buyers use these tactics to re-negotaite price terms.
2. There is a general practise amongst buyers/drawees of not collecting documents unless the ship carrying the goods is not berthed at the Port of Discharge (often the port in the buyers country). This is more common in longer ocean routes (e.g.- shipment from Australia to Europe etc). This however, locks in the working capital of the seller/drawer, as the payment is not received. This disadvantage opens up a requirement of the seller/drawer of discounting the DP documents, for a period of a few days to 1 month or slightly more, by the Remitting bank.
3. The seller gets paid upfront for the goods sold, and is not required to give any credit period.
4. It is note worthy to understand that occasionally there is also an opportunity risk that is created, for the seller, if the buyer refuses to collect documents. This however is not very common, as noted in point 2.
5. Like the buyer, the seller also has to pay service fees to the Remitting bank for handling the documents, making it expensive.