Documentary Collections Part 2-b

The second most important and commonly used documentary collections method is called, Documents against Acceptance or also known as DA.

Whether the seller/drawer or the buyer/drawee uses DA or DP terms, for their trade settlement, is always pre-decided at the stage of the sales contract, formally, or when the purchase orders or pro-forma invoices are shared between the parties.

DOCUMENTS AGAINST ACCEPTANCE (DA)

In this method of trade settlement the seller is allowing the buyer with a certain pre-agreed credit term, for making the payment for the goods sold. Hence there is a future payment obligation of the buyer towards the seller.

The question now arises on how will the seller have this payment obligation documented to make this legally enforceable. There is a legal instrument used in this type of collection method, and its called a Bill of exchange, or also commonly known by the word ” Draft”. I will discuss on the Bill of exchange itself in my next blog.

The bill of exchange is issued by the seller and is always drawn on the buyer, unless there is certain requirement called avalization ( I will also discuss this in my later blogs on financing options) and upon receipt of the shipping documents, and the bill of exchange, the buyer would sign the bill of exchange to acknowledge the indebtedness towards the seller, at a set due date.This is generally issued in two copies, and is on the letterhead of the seller, with a stamp and signature along with a date.

The Bill of exchange shows an indebtedness of one party to another, at sight or at a pre-determined date, in this case at a pre-determined date. The due date of the payment obligation is pre-decided by the parties and the general set triggers could be as below..

1. XX days from date of the Bill of lading
2. XX days from the date of the invoice
3. XX days from the date of acceptance

The above dates are mentioned on the face of the bill of exchange to arrive at the payment obligation date.

One should be mindful to note that the payment obligation is solely of the buyer/drawee and NOT the Collecting/Presenting Bank, which is merely handling the collections, as per the instructions of the Seller/Drawer.

Advantages/Disadvantages for the Buyer/Drawee

1. The main advantage of the buyer is that of the credit period that they would enjoy by means of this arrangement, thereby, not blocking their working capital till either the goods are sold, if the buyer is a trader, or the finished goods manufactured, if the buyer is a manufacturer, and the concerned goods here is the raw material.
2. The only disadvantage that the buyer has here, is on the specification and the quality of the goods, as the buyer would have to sign the bill of exchange prior to the Collecting/ Presenting bank handing over the original set of documents. By signing the bill of exchange the buyer would initiate a payment obligation towards the seller.

Advantages/Disadvantages for the Seller/Drawer

1. Documentary collections is uncomplicated and hence provides ease of transacting and documentation for the seller.
2. The biggest risk the seller has is of non-payment under the collection, by the buyer on the accepted due date as per the debt acknowledged on bill of exchange. However, there are legal avenues, for the seller as the bill of exchange being a quasi negotiate instrument, is covered under the negotiable instruments act in many jurisdictions.

In my next blog, we will see, what exactly are bills of exchange…till then, stay safe and take care of yourselves and your loved ones !!!