When transacting internationally, there are certain risks two of which are payment reliability and whether or not you will get what you have asked for. Collection agreements, that is, documentary collection is one of the common methods that the parties can use. Collection arrangements are governed by international regulations sponsored by the International Chamber of commerce (ICC) and applied by most banks in the world. The issue is how does this work?
HOW DOCUMENTARY COLLECTION WORKS
Assuming the buyer and the seller have agreed that collection of the price in an international sale of goods is to occur at the buyer’s place, the seller will hand over the shipping documents, which will include the bill of lading to his own bank which in this case is the remitting bank. The seller’s bank will then pass the documents to a bank at the buyers place, this is the collecting bank.
The collecting bank will then present the bill of exchange to the buyer and request him/her to pay or accept the bill. When the buyer does so, the collecting bank releases the shipping documents to the buyer. The buyer thus receives the original bill of lading which enables him/her to obtain the goods from the carrier on arrival of the ship.
It is important in this context to fully understand the documents that the seller prepares or obtains and documentation that the buyer needs to access ownership.
Documentary collection can occur in two ways:
- Documents delivered against payment
In this form of agreement the buyer is required to pay the price before receiving the documents from the bank. The document to be received in this set up will include the bill of lading which is a title documentation. You should however know that in case the goods are to be brought in via air, airway bill is not a title document and it is also not a negotiable instrument.
- Documents against acceptance
In this case the nature of the agreement is such that the buyer is able to take delivery of the goods on acceptance of a bill of exchange. This means a reduction of risks associated with storing goods at the port unlike in documents delivered against payment.
WHAT IF THE BUYER DEFAULTS? Risk management
The seller can have the agreement structured such that the buyer’s bank (collecting bank) is required to co-accept the bill of exchange the process is known avalisation. This way on maturity of the bill of exchange even if the buyer refuses to pay the bank will pay. The idea in this arrangement is that the seller’s risk is connected to the bank and not the buyer.
Confirm Sign Up via the Email you provided