The bank handles, it does not guarantee
In a documentary collection you hand the shipping documents to your bank with instructions, and it sends them to your customer’s bank. That bank only releases them to your customer if they meet the condition you set: paying, or accepting a term draft.
The difference from a letter of credit is the one that decides everything: here no bank undertakes to pay. Banks handle documents. If your customer decides not to collect them, nothing happens from a banking point of view: what happens is that you have goods in a foreign port and a problem.
In exchange, it is far cheaper and far quicker to set up than a credit. It is the instrument for the customer you already trust but not yet enough to give open credit.
The two variants
| Variant | The bank releases the documents | Risk you take |
|---|---|---|
| Documents against payment (D/P) | When the customer pays | That they do not collect: goods stranded at destination |
| Documents against acceptance (D/A) | When the customer accepts a term draft | That they accept, collect the goods and then do not pay the draft |
D/A is appreciably riskier: you hand over the goods in exchange for a signed promise. Only with a track record, or with credit insurance behind it.
It only works if you keep control of the goods
A collection makes sense when the documents you hand over are the goods. In sea freight with a negotiable bill of lading, whoever does not hold the original collects nothing: there the collection works.
By air or by road, it does not. The Air Waybill and the CMR are not documents of title: the goods are released to the consignee named on the document, with or without the papers. A collection over an air shipment consigned to the buyer protects you from nothing.
The way to save it in air freight is to consign the AWB to the bank, and that has to be agreed with them before shipping.
Before handing the collection to the bank
- Transport is by sea and the B/L is negotiable, or I have consigned the document to the bank
- I have written the instructions clearly: D/P or D/A, and what to do if they do not collect
- I know who pays each bank’s charges and it is agreed with the customer
- I have decided what happens to the goods if they are not collected, and what it would cost me
- If it is D/A, I have a track record with this customer or credit insurance
- The documents are complete: with one missing, the bank cannot release anything
Where it fails
- Using a collection on an air shipment consigned to the buyerThe AWB is not a document of title. The airline releases the goods to the consignee even if the documents are still at the bank.
- Accepting D/A with no track recordYou hand over the goods against a signature. If the draft is not paid, you have neither goods nor payment, only a claim in another country.
- Ambiguous instructions to the bankThe bank does literally what the collection instruction says. Whatever is not written down does not get done.
- Not planning for non-collectionDemurrage runs from day one. By the time the problem is noticed, the port invoice is already significant.