COLLECTIONS - IMPORT & EXPORT/ CLEAN or DOCUMENTARY

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A collection is another form of payment mechanism where an exporter/seller uses the services of the banks to collect a payment from an importer/buyer and is an alternative to open account terms and payment in advance. The two types of collection are either a documentary or clean collection.  

The documentary collection is where the exporters/sellers bank and sometimes described as the collecting bank (and can also be known as the agent for the exporter/seller), couriers/posts a schedule (on bank headed paper) to the buyer/importers bank. Attached to the schedule are the sellers/exporters commercial documents and often the transport documents are included. The collection schedule contains a list of instructions that the importers/buyers bank (also known as the overseas collecting bank) is expected to adhere to. These instructions cover a number of processes including how they should deal with the with the documents, the settlement or payment, the action to take if the documents are not accepted/paid and may contain the name of a local third party who may act for the seller/exporter. This third party is often referred to as the ‘Case of Need Party’  

The option for the release of documents is of particular importance when the package includes a full set of original bills of lading (B/L). The B/Ls are in effect the control mechanism for gaining/holding title to the underlying goods. It will of course depend on how the bills of lading have been ‘cut’ and we will explain this a little later in this section. Suffice to say as an exporter/seller you probably do not want your buyer getting hold of the goods without a commitment to accept and pay at a future pre-determined date or pay immediately. The latter course of action is by far the lower risk option of the two but the acceptance risk can be mitigated. To have a full set of BLs pass across the counters of the bank enables the bank to create a pledge over the goods. If the BLs are in a particular form, they could be described as ‘bearer’ BLs and if the bank/lender is able to create a security interest in the goods, it may help with the securitisation of loans used to fund the payment of the invoice to the exporter/seller. Trade finance loans will be covered in a separate section. 

In either case the seller/exporter may also choose to include a financial instrument such as a bill of exchange. The subject of bills of exchange will be dealt with later in this section.   

The Clean collection is simply where a financial instrument is presented for payment and the financial instrument (bill of exchange or Promissory Note) may be evidence of a debt due pursuant to a documentary collection where documents were released against acceptance. 

The two main methods of handling the collection are: 

D/P – Documents release to the importer/buyer against payment 

D/A – Documents released to the importer/buyer against acceptance meaning payment will be made at normally a fixed future date.

 Easy to remember - If you are sending documents it is an Export Collection, if you are receiving documents it is an Import Collection.

Not a common practice but that does not stop anyone going down this route, collections can be used for domestic trade and sometimes this may be an appropriate if you wish to mitigate some risks. We will explain when how and the benefits of perhaps looking at a ‘domestic’ collection where some structure to the deal may be beneficial to both the seller and the buyer including control of goods, funding and security. Some banks may be reluctant to handle domestic collections but we will help you explain to them why it may be better for you and your business. Why should you not be as risk averse as the lender? More on this subject later. 

The words used to describe the various parties in collections are set out in the section below and we will try and make it easy to follow.

The International Chamber of Commerce is the body responsible for Uniform Rules for Collections and these are a practical set of rules to aid bankers, buyers, and sellers in the collections process. URC 522 rules came into effect on 1 January 1996 and remain ICC’s standard rules for collections and are generally adopted by most banks in the handling of documents processed through the banks on a collection basis.   

The URC underline the need for the principal and/or the remitting bank to attach a separate document—the collection instruction—to every collection subject to the Rules;   They make it very clear that banks will not: 

• Examine documents;  

• Address problems banks may experience in respect of documents against acceptance and documents against payment;  

• Have any  obligation to store and insure goods when instructed.  

Collections remain a safe method of handling documents but the devil is in the detail so clear and concise instructions whilst complying with the URC are a must. Your bank should be able to offer practical help and advice both on the form of the collection and URC 522

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