The Treasurer’s Guide to Trade Finance

Chapter 3 Understanding trade

Documentary collection

The importer will either make a payment

or will promise to pay the collection order

through the signing of a bill of exchange.

This is a pledge to pay on a set future date,

perhaps in 30, 60 or 90 days (the usance

period), depending on the initial agreement

between the importer and exporter. In return

the importer will receive the title documents

from the collecting bank, enabling it to take

control of the goods.

The collecting bank will then pay the

remitting bank the funds either immediately

(if a cash payment was made by the

importer) or in the future (if the delivery of

the documents was against an acceptance).

The remitting bank then pays the exporter. In

this process the banks offer no guarantee of

payment, unless the collecting bank avalises

the bill (see below).

1. Parties agree contract of sale


2. Seller ships goods to buyer


3. Seller sends collection documents to its
   bank


4. Seller’s bank sends documents on to
   buyer’s bank


5. Documents presented to buyer by its bank


6. Buyer pays (collection against payment) or
   accepts bill (collection against acceptance)


7. Buyer’s bank sends payment to seller’s
   bank, if payment received, or a notice of
   acceptance, if bill accepted


8. Seller’s bank pays seller, if payment
   received, or holds accepted bill until
   maturity, if bill accepted

Physical movement of goods

Movement of commercial documents

Payment or movement of financial

documents

1

3 8 6 5

2 6

7

4

Buyer’s

Bank

Buyer

Carrier

Seller^

Seller’s

Bank

Collection against payment

Under the terms of collection against payment, the importer is required to pay, before the

documents of title are released. From the exporter’s perspective there is a risk that the

importer will refuse to pay. In these circumstances the importer will not usually be able

to take delivery of the goods, meaning the goods will need to be stored and insured at

the port while the dispute between the parties is resolved. Exporters usually include a

standard ‘store and insure’ provision in the contract, as protection against such events.

Collection against acceptance

Under the terms of collection against acceptance, the importer is able to take delivery

of the goods on acceptance of a bill of exchange, so the risk of a dispute resulting in

the need to store goods at the port is reduced, compared to collection against payment

(although the importer could refuse to take delivery of the goods for other reasons).

In contrast to open account trading, the exporter at least holds an accepted bill of

exchange as security, although in both cases the importer does hold title to the goods and

is effectively using the exporter to finance working capital.

Although the exporter should be able to anticipate the collection of funds at the end of