Letters of Credit
In such international sale-purchase transactions, the bank undertakes the function of the seller’s agent, receiving money from the buyer in its domicile.
Documentary collection is the amount collected by a bank from the buyer’s account at a specified time against financial and trade documents or only trade ones. The exporter submits shipment documents (most often when freight is delivered by sea) to the bank, for instance: the invoice, the bill of lading, the packing list, the certificates of origin and quality, and instructs the bank to send the documents to the buyer’s bank, authorising the bank to issue documents to the buyer only following the payment remittance in favour of the exporter or acceptance of the promissory note.
The transaction is performed at the instruction of the exporter who determines the collection conditions and presents the documents to its bank pursuant to which the payment has to be made. Both banks performing the collection are intermediaries and they bear no responsibility for non-payment or non-acceptance of the documents. Their obligations are limited to the fulfilment of the client’s instructions – to issue the documents against the payment or acceptance of the promissory note.
Documentary collection is beneficial to the exporter due to the fact that the bank protects its right to the goods until the time of payment against the documents. The importer is granted the right to the goods by the documents of title which he receives upon remittance or performing other conditions of the collection. The collection form of settlements is beneficial to the importer due to the fact that it anticipates payment for the de facto supplied goods.
The existing forms of documentary collection are regulated by the Uniform Rules for Collections (URC) developed by the International Chamber of Commerce (1995 Edition).
The seller must be aware that such a form of settlements does not guarantee payment pursuant to the documents when the buyer cannot or does not want to pay; therefore, such a form is expedient only when the buyer and the seller trust each other.
Fees: Documentary Collection