Documentary Collections are as well as letters of credit a further instrument of handling payments in international trade. In this case the delivery documents are only handed over once payment has been received and, compared with an open invoice, offers you as an exporter considerably more security – cost-effectively and non-bureaucratically.
Documentary Collection is particularly suitable for those foreign transactions in which exporters and importers already have a well-established relationship. The bank acts solely as a trustee: Under a collection order, the exporter hands over the export documents to Erste Group (remitting bank) with the instruction to forward these documents to the importer’s collecting bank only in case the importer has paid or has accepted a Bill of Exchange.
There are two types of Documentary collections:
Documents against Payment Collection (D/P):
The importer receives the delivery documents only against payment.
Documents against Acceptance Collection (D/A):
Delivery documents are handed over against acceptance of a Bill of Exchange or a promise of payment.
Advantages and disadvantages
Documents can be recalled anytime
Lower risk of payment default
Disadvantage: Buyer’s risk and political risk in buyer’s country
Payment is made only against delivery of goods/documents
Lower risk of non-delivery
Disadvantage: Payment is made before goods can be checked