One minute guide.
Documentary collection is a system to help exporters.
It is used by exporters:
to ensure that control of the goods is retained until the exporter is sure that the buyer will pay, and correspondingly,
to allow the buyer to check that he is getting what he expects before committing to pay.
This is done by involving two trusted banks, who deal with the documents and the cash. There is a formal set of rules (called URC522, the Uniform Rules for Collections) that is used to govern documentary collections.
The exporter loads the goods for shipment to the buyer.
The exporter lodges his shipping documents with his bank. These are usually original shipping documents, so these are documents that a buyer would physically need in order to take control of the goods that are shipped.
The original documents are then sent from the exporter's bank to the buyer's bank. The buyer's bank then contacts the buyer; he will provide a copy of the documents received, confirm what originals are held, and state the amount that the exporter wants to be paid for the documents.
If the buyer wants to receive the documents, he can instruct his bank to make the payment. The buyer's bank then releases the documents.
If the buyer does not want the documents, he tells his bank who then returns the documents to the exporter.
So this is a way of using a trusted intermediary to manage the relationship between an exporter and his buyer - ensuring that payment is made against accepted shipping documents.
Documentary collection is not cheap, but it is much cheaper than a letter of credit.
Moreover, if a buyer letter of credit becomes discrepant, any obligation to pay has fallen away - and the letter of credit has, basically, turned into a documentary collection. So it is actually better for an exporter to use documentary collection rather than letter of credit if the conditions on a letter of credit are unlikely to be met.
Documentary collection is initiated by the exporter not the buyer.
The exporter's bank collects the documents together and sends them to the buyer's bank with clear instructions about what should happen next. The first thing that a buyer's bank may know about a documentary collection is when the documents appear.
Usually things go wrong if the instructions provided to the buyer's bank are not clear, or if the documents are not sent to the right address.
Since this process is initiated by the exporter, it is vital that instructions are given in the proper form, and the documents are sent to the right place. Often the right place is not a bank branch but a central trade finance department. Sending the documents to the wrong place, or with unclear instructions can result in weeks of delay and additional costs.
So documentary collection should only be used with the support of a specialist who understands the system and can make sure that the documents are routed appropriately.
Using export finance from PrimaDollar automatically provides the same protections to the parties that documentary collection offers.
In addition, PrimaDollar also provides a standalone documentary collection service without finance that is cheaper, quicker and simpler than that offered by an importer bank - and our service can be used even in countries such as Bangladesh where regulations are particularly strict.
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You can also read further articles on our site:
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