What is a Documentary Collection?
A Documentary Collection is a method of payment used in international trade whereby the Exporter entrusts the handling of trade documents to banks and gives the banks instructions concerning the release of these documents to the Importer. The two most common conditions for release are:
- Documents Against Payment (D/P): Documents may be released only if the Importer makes immediate payment according to the contracted agreement between the Exporter and the Importer. Also known as a sight Collection.
- Documents Against Acceptance (D/A): Documents may be released only if the Importer accepts the accompanying draft, thereby incurring an obligation to pay at a specified future date. Also known as a term Collection.
Parties in a Documentary Collection
Collecting Bank: Any bank, other than the Remitting Bank, involved in obtaining payment or acceptance from the Importer (drawee).
Drawee: The party, also known as the buyer or Importer, who is presented with documents (financial and/or commercial) for the purpose of either payment or acceptance, in accordance with the Collection instructions.
Drawer: The party, also known as the seller or Exporter, who authorizes a bank (the Remitting Bank) to handle documents on its behalf.
Presenting Bank: The Collecting Bank that presents the documents to the Importer (drawee), usually the Importer's bank.
Remitting Bank: The bank that the Exporter authorizes to carry out the Collection on its behalf.
Step-by-Step Process for the Exporter
The following is a detailed explanation of the process you, as an Exporter, follow when transacting through a Documentary Collection. In this explanation, TD is acting as the Remitting Bank (i.e. on behalf of the Exporter).
(Please note that an Exporter does not have to be a TD customer to remit a Collection through TD).
- Establish a sales contract with the buyer where you both agree that payment will be made by Documentary Collection.
- Arrange for delivery of goods to the transport company (air/sea/land), obtain transport documents from your carrier and prepare other documents as agreed upon with the Importer.
- There are three ways to communicate your request for TD to process the Collection:
- Collection Instruction: A manually-generated letter accompanied by the documents providing specific instructions on how to process the Collection. Click here for a sample copy and instructions on items to include in your Collection Letter.
- Direct Collection Instruction: A form supplied by TD to Exporters who settle large volumes of transactions through Collections. Once the form is completed, the original is sent along with the documents directly to the Collecting Bank. A copy is sent to TD for record purposes, follow-up, pursuing payment or acceptance, while you keep a third copy. For a Direct Collection Instruction form, please contact the nearest TD International Trade Services office.
- Facilitrade Direct Collection Instruction: The same form is available electronically through our Facilitrade for Exporters product. For more information on Facilitrade, please contact the nearest TD International Trade Services office.
- Your next step depends on the Importer's response to the presentation of documents.
Scenario 1
Willingness to Pay - Documents Against Payment: If the Importer promptly pays a sight Collection, then the amount of the Collection less banks charges will be forwarded via the Remitting Bank and paid to you according to the Collection Instruction.
Scenario 2
Willingness to Accept - Documents Against Acceptance: If the Importer accepts a term draft, then you will be notified of the acceptance. Assuming the Importer authorizes payment at maturity, proceeds less bank charges will be forwarded via the Remitting Bank and paid to you according to the Collection Instruction. Note: Acceptance of the term draft by the Importer does not guarantee payment at the maturity date.
Scenario 3
Unwillingness to Pay - Documents Against Payment: In the case that the Importer refuses to pay a sight Collection, the Collecting Bank will advise the Exporter and either proceed according to the Collection Instruction or obtain new instructions from the Exporter, depending on the Exporter's wishes.
Scenario 4
Unwillingness to Accept - Documents Against Acceptance: If the Importer refuses to accept a term draft, the Collecting Bank will advise the Exporter and either proceed according to the Collection Instruction or obtain new instructions from the Exporter. e.g. *protest, renegotiation, alternate buyer, etc. Without accepting the bill of exchange, the Importer cannot obtain the documents. However, if the Importer accepts the bill of exchange but refuses to pay at maturity you have lost control of the goods. Solutions to the problem are available only through renegotiation with your customer or legal action.
Document Preparation: How to Complete a Draft
1. If this is a term draft and a specific maturity date applies, it is entered here.
2. Today’s date, the date when the draft is completed.
3. Payment term, eg. “at sight”, “30 days after sight”.
4. Dollar amount in words along with the currency.
5. Dollar amount in figures along with the currency.
6. Your customer’s (The Importer) name and address.
7. Your name (company and signature).
Advantages and Disadvantages of a Documentary Collection to the Exporter
Advantages:
- Documentary Collections are less complicated and less expensive than Letters of Credit.
- Documents are not released to the Importer until payment or acceptance has been effected.
- Collections may facilitate post-export financing.
Disadvantages:
- No guarantee of payment.
- Seller's capital is tied up until funds are received.
- Country risks are not hedged.
Questions Exporters Commonly Ask About Documentary Collections
Discounting Acceptances:
Q: I agreed to a term Documentary Collection to be paid 90 days from sight. Is TD able to make payment arrangements before this maturity date?
A: If you are a TD customer, TD may discount the Collection either with recourse against your line of credit or if the Collection has been avalized. As a non-TD customer, TD may still discount the Collection so long as it has been avalized and depending on existing market conditions. A collection is avalized when the Collecting Bank has signed the draft along with the Importer, thereby guaranteeing payment of the draft in the event the Importer defaults.
The Uniform Rules for Collections:
Q: How do I get a copy of the Uniform Rules for Collections (Publication 522)?
A: Contact the nearest TD International Trade Services office, and we will be happy to provide you with a copy. Otherwise, you could also contact the International Chamber of Commerce directly.
First Mail & Second Mail:
Q: On some Collection instructions, there is reference to a "First Mail" and a "Second Mail". Please explain these terms.
A: "First Mail" and "Second Mail" refer to the practice of separating documents into two separate mailings in order to minimize the risk of losing the documents -- many of them originals. Based on today's common usage of couriers, this practice rarely occurs.
Goods Abandoned on Foreign Wharf
Q: I sent a shipment of goods under a sight Documentary Collection. The Importer refused the documents, and now my goods are stranded on a foreign wharf. What are my options?
A: There are four main courses of action available to you:
- Send new instructions to the Collecting Bank through the Remitting Bank to protest your customer's refusal to honour the sales contract.
- Renegotiate terms with your customer
- Find a new buyer for the goods.
- Pay the shipping costs to have the goods returned to you.
Unfortunately, there is no ideal solution available in this situation.
Obtaining Draft
Q: Where can I obtain a blank draft for a Collection?
A: Contact the nearest TD International Services unit. Click here for a look at a sample draft as well as instructions on how to fill it in.
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