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A documentary collection is usually, but need not be, subject to a set of rules governed by the ICC, known as the ICC Uniform Rules for Collections, Publication No. 522 (or URC 522 for short).

A collection can be defined as - "The delivery of a draft, promissory note or cheque and/or documents by a bank to a third party (i.e., an importer), on behalf of the exporter, against fulfilment of certain conditions i.e., payment, acceptance or another specified consideration."

For the exporter, it bridges the gap between open account and documentary credits by providing a potentially higher level of security than open account, through the control of the documents by banks, without the often onerous terms and conditions of a documentary credit. 

For importers and exporters, a documentary collection attracts cheaper bank costs than those associated with a documentary credit.

Considerations:

• Requires a certain trust in the importer i.e., their standing and financial position.
• No previous adverse experiences i.e., payment delays, non-payment.
• Importer should be located in a politically stable country.
• There is a possibility to retain control of the goods via documents of title i.e., bills of lading o rconsignments to a bank (with prior agreement).
• There must be an understanding that one of the parties will take out necessary insurance cover for the transit of the goods.

Main Risks:

• Importer/Buyer Risk (Credit Risk) - e.g., an importer may not pay for the goods due to insolvency or willful default.
• Country Risk - e.g., an importer may be more than willing to pay for goods received but its Government may introduce laws (i.e., exchange controls), which prevent payment being made.
• Transit Risk - e.g., the need to insure risks for the movement of goods including damage, loss and theft, loss and/or damage.

Types of collection:

• Clean Collection: A collection instruction containing only a financial document.
• Documentary Collection: A collection instruction containing commercial documents that may be accompanied by a financial document.

Abbreviated terms:

• D/P (Documents against Payment): Documents are to be released upon payment by the importer.
• D/A (Documents against Acceptance): Documents are to be released upon the importer accepting a draft drawn on it. Payment of the draft at maturity is subject to the importer authorising payment at that time. With the growing use of deferred payment as an alternative to the acceptance of a draft, D/A can also refer to the release of documents upon the importer undertaking to pay on a specified due date.

Document types:

• Financial: A description given to bills of exchange (drafts), promissory notes, cheques, etc.
• Commercial: A description given to shipping documents such as invoices, transport documents, insurance documents, etc.

Key pre-conditions

• Prior to the importer and exporter agreeing on settlement by documentary collection, the exporter needs to ensure that it has a banking infrastructure in place in order to facilitate such a transaction.
• For example, there will need to be an existing banking relationship between the exporter and the remitting bank.

Obviously this will require the remitting bank completing its usual KYC (Know Your Customer)  

More information can be found in the Documentary Collections modules at www.tradefinance.training