The Treasurer’s Guide to Trade Finance

Chapter 6 The use of documents in trade

process, especially when the documents

need authentication by a third party.

Documentary collection

A documentary collection shifts the balance

of risk from the exporter slightly towards

the importer, compared with open account

terms. Unlike the latter, where the goods

are exchanged on presentation of the

appropriate document of title, under a

documentary collection the importer takes

control of the goods on presentation of

an appropriate document of title (typically,

the same documents which would be

presented under open account terms)

together with some form of commitment

to pay (typically a bill of exchange). (See

page 111 for more information on how a bill

of exchange works.)

A bill of exchange

The document exchange is usually

administered through the importer’s bank. The

bank has the responsibility of ensuring the

documents presented match the documents

required under the terms of the contract.

Broadly speaking, there are two different

types of collection.

ƒ Collection against payment.

Under these circumstances the

documents are exchanged for immediate

(sight) payment. This provides relative

security of payment for the seller, as long

as the required documents are in order,

and allows the seller to predict the timing

of the collection of payment.

ƒ Collection against acceptance.

Under these circumstances the documents

are exchanged for a bill of exchange. The

bill of exchange will have been accepted

(signed) by the importer, indicating

payment will be made on the future date

indicated on the bill of exchange. This

allows the importer to manage its cash

flow, whilst providing additional security to

the seller in the form of the accepted bill.

This also allows the seller to predict the

timing of the collection of payment.

Note: in some cases, a clean collection

process is used whereby only the bill of

exchange is passed between the banks.

The documents of title are sent directly

from the seller to the buyer and there is no

link between the two. A clean collection is

therefore more like open account trading,

as the seller can take title of the goods

without committing to making a payment.

Understanding the documentary

collection process

The process of documentary collection

Drawer

(Seller)

Drawee

(Acceptor)

(^3) Buyer
2
1

1. Drawer writes bill of exchange on
   drawee (a bank or the drawer’s
   customer) and sends it to drawee


2. Drawee accepts bill (and becomes
   acceptor) and sends bill back to
   drawer


3. On due date, drawee will honour the
   bill by paying the face value to the
   drawer

Buyer’s

Bank

Buyer

Carrier

Seller^1

3 8 6 5

2 6

7

4

Seller’s

Bank

Physical movement of goods

Movement of commercial

documents

Payment or movement of financial

documents