Text 1 Collections: Advantages and Disadvantages

Documentary collections provide a method of payment in international trade which, like documentary credits, provide a compromise between:

(a) payment in advance, whereby the buyer must trust the exporter to send the goods as asked for and paid for; and

(b) trading on open account, whereby the exporter must trust the buyer to pay for the goods that have been sent to him.

Being a 'compromise', documentary collections are not ^‘ideal’ for either the exporter or the importer, but they can be made to suit the main requirements of both exporter and importer in many situations.

The advantages of collections to an exporter are that:

(a) a presenting bank may have more 'status' or influence over the foreign buyer, and might be more able to extract payment from the drawee than if trade were on open account terms;

(b) the exporter may be able to obtain immediate finance using a bill of exchange, either by negotiating the bill or obtaining a bank advance against security of the bill;

(c) collections are cheaper than settlement under a documentary credit system;

(d) in the case of documentary collections, the exporter can retain control over the goods until the buyer accepts the bill drawn on him (D/A) or pays the bill (D/P);

(e) a bill of exchange, once accepted, is binding on the drawee, and a promissory note, once issued and delivered is also binding. Term bills and notes therefore provide some form of security to the exporter, whilst at the same time allowing a period of credit to the buyer.

The advantages of collections to the importer are:

(a) in the case of clean collections, the buyer can take possession of the goods before paying for them;

(b) in the case of documentary collections, the buyer can have the goods inspected by a third party, prior to shipment, and so before accepting or paying a bill, a third party certificate of inspection could be specified as one of the commercial documents in the collection. (However, in the case of a D/P collection, a buyer may receive a demand for payment before the arrival of the goods in his country);

(c) term bills (with D/A collections) provide the buyer with a period of credit from the exporter.

The disadvantages of collections to the exporter are that:

(a) documentary collections involve some risks for the exporter, because an overseas buyer might refuse to pay or accept a bill on presentation of the documents to him. The exporter must therefore decide whether to abandon the consignment, store the goods or re-ship them. 'One should also bear in mind that very often exporters have not got a document of title as goods have to be shipped (by air, by road or rail) where documents of title are not issued for the benefit of the exporter.' With D/A collections, the exporter might still have documents of title to the goods, but must ask the bank overseas or an agent to take action to protect the goods on the exporter's behalf;

(b) the remittance of documents, and collection times, are slow, and the exporter might have to wait a long time for his money. To add to the delay, it is common practice in some countries to defer the presentation of documents for payment or acceptance until the goods have arrived in the country.

(c) in the event of delays or difficulties (eg having to warehouse goods at the port of destination until the buyer takes delivery) the costs are borne by the exporter;

(d) the exporter allows credit with term bills, and so must finance working capital, ie debtors. Set against this, it is possible to obtain finance from a bank against a collection (by means of a bank advance or negotiation of a bill) but nonetheless only at a cost to the exporter.

The disadvantage of collections to an importer is that legal action can be taken against him in the event of default on an accepted bill of exchange (regardless of the condition of the goods). Refusal to accept or pay a bill might also lead to a protest against non-acceptance or non­payment, which might seriously damage his financial reputation.

Although they might be a slow method of payment, documentary collections can nevertheless help to speed up the remittance of funds to an exporter, compared with clean collections. There are several reasons for this.

(a) The presenting bank is under an obligation to present documents without delay, and to present an accepted bill for payment not later than its maturity date.

(b) The presenting bank ensures that documents are released to the buyer only on acceptance or payment, and so the buyer must accept or pay the bill of exchange before he obtains the documents (which will often include the documents of title). This will help to speed up action by the buyer.

(c) When payment has been received, they can, if specified in collection order, be remitted by TT or EIMT, thus reducing the payment delay still further.

NOTES

d/p – documents against payment

d/a – documents against acceptance

TT – telegraphic transfer

EIMT – an express international money transfer

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