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 !!!

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.

In my last blogs we saw the two methods of trade settlements (advance payment/open account) which are commonly used by buyers and sellers worldwide.

Advance payment and Open account, both, do not involve banks, in terms of routing of documents, or payment obligations. The buyer simply, uses the banking network for making a remittance to the seller for the goods that are sold.

We will now see the next method of trade settlement called Documentary collections with the applicable set of rules and the process involved.

Documentary collections, if very simply put, is routing of documents (transport documents, commercial invoices, certificate of origin etc) by the seller through their bank to be handed over to the buyer, through their bank, upon certain payment instructions, to be made by the buyer

Documentary collections are governed by URC (Uniform Rules for Collections) ICC publication 522. This came in effect on the 1st of January 1996, and is still in effect, however one should be mindful that the URC 522, is a set of rules and are not laws or regulations.

URC 522 is only applicable to documentary collections, if they are said to be applicable on the Covering schedule (we will see this in my later blog) submitted by the bank. If applicable, the rules do not give a chance of any ambiguity in interpretation of terms etc, between the buyer, seller and the banks involved.

It is important to know the correct terminology used and the parties in Documentary collections…..

Drawer/PRINCIPAL – this is the seller/exporter in the transaction, and sends documents (as seen above) through their bank.

Remitting bank – this is the bank on the sellers/drawers side, which collects documents from the seller/drawer and simply acts as per the instructions from the seller. The seller will mention the buyers bank details, for sending the documents, along with the disposal instructions (we will this in my later blog)

Collecting bank – is any bank, other than the remitting bank, involved in processing the collection.

Presenting Bank – this is the collecting bank on the buyers/drawee/importers side of the transaction, which receives, processes the documents, from the Remitting bank, along with the Covering schedule, which carries the disposal instructions of the documents and presents the documents to the drawee.

Drawee – this is the buyer/importer in the transaction, and has a payment obligation towards the seller, as per the contractual terms, and collects the documents from the presenting bank, as per the disposal instructions.

This method of trade settlement is exactly opposite to Advance payment, and is generally used when the buyers dictate the market dynamics or when the buyers are larger corporates, and sellers are SME’s.

The sellers are required to ship the goods prior to receipt of any payment, or in some cases might receive a percentage of the payment.

There is also a market practise, wherein, post the shipment, the sellers send an electronic (fax or email) copy of the Bill of Lading, Airway Bill etc., to the buyer and against which the buyer initiates a payment. However, this only happens when there are regular transactions between the buyer and the seller, and there is a certain degree of trust that the buyer has on the seller.

Risks for Buyers

1. No percieved risk for the buyer if the seller ships the goods, as per the contractual terms. However, we cannot deny a certain element of opportunity loss that the buyer may have, if the goods are not as per the specifications. This loss can be higher if the buyer is a trader and doing a back to back deal, as the buyer may not be able to fulfil the obligation on their sell side of the trade.

Risks for Sellers

1. Higher risk for the sellers as the shipment of the goods would happen prior to any payment. The seller, would lose physical control of the goods, though the constructive control remains, however, getting the goods re-routed back to the port of loading or to another destination will cost time and money. In some cases sellers may not even find alternate buyers.
2. Payment delays / partial payments, is another risk that the sellers need to perceive, when opting for this trade settlement, as the complete onus and control of the payment obligation entirely lies on the buyer.

Further on, we now come to the first method of trade settlement/ payment

In the ever so fluid landscape of business, the market dynamics, the demand and supply change ever so rapidly, especially when we have such an interconnected world.

In a business situation wherein the market dynamics and the demand and supply, lean more towards the seller, this method of trade settlement is most often seen.

The market practise requires the buyer to make the payment of the goods in advance, and against which, the goods are shipped by the seller. The advance payment made by the supplier/seller is often a certain percentage of the total invoice, or in some cases on a 100% basis.

One often gets to see this settlement method applied where the buyer is a smaller SME business and the seller, a well established company. Also in cases where the seller demands a market share of the particular type of goods, and has a certain monopoly.

This method of trade settlement poses certain risks to the parties, which we shall see below….

Risks for buyer

1. Payment risk – the buyer has made a payment to the seller, however, is not sure if the goods are being shipped or not.
2. Performance risk – the buyer is also at risk, in terms of the quality, quantity, and the description of goods that are being shipped, as the buyer is not in a position to check this.
3. Opportunity risk – based on certain commitments by the seller, in terms of shipment date etc., the buyer in turn has business commitments to their customers. The opportunity risk lingers, if the seller does not ship the goods in a timely manner

Risks for seller

1. If the payment is done in advance at 100% of the invoice value, there is no perceived risk of the seller, however, if the trade terms are agreed at a lesser percentage, then the seller carries the risk of payment receipt for that amount.

There are 4 classical methods of trade payments or settlements, in local and cross border trade. The usage of each method entirely depends on the following….

1. Relationship between the buyer and the seller
2. Financing options available
3. Economics – buyers market / sellers market
4. Market risks
5. Country risks

The following 4 methods of trade payment are as follows…

1. Open Account
2. Advance Payment
3. Documentary Collections
4. Letters of credit

Occasionally, other than the above 4 methods, the following are also used, as a quasi method of payment, which acts more as a security for non-payment, than as an actual method of payment/ trade settlements…

1. Guarantees
2. Standby letters of credit

I will extensively cover these in my further blogging…..

Thank you visiting my blog. I am a professional practitioner in international trade for the past 15 years, and have spent most of this time in advising clients on the appropriate application of the methods of trade payment and the usage of trade instruments, to mitigate payment and performance risk in local and cross border trade

It is said that trade between countries and communities, brings peace and prosperity. This cannot be truer than ever before, where wars and disharmony rampages our world.

It is evident from every diplomatic visit of world leaders, the endeavor to increase, cross border trade, is always on the highest priority.Like in any adventure sport, the fear of the unknown, also persists in cross border trade, hence it is even more important that this knowledge is applied correctly.

In my blog, I will be discussing the very basics of international trade, to assist & facilitate novices and practitioners alike, on the nuances of international trade using different payment methods and trade instruments…

It will be my endeavor for all those already working as trade practitioners, to make this blog as a refresher.