Each exporter and importer needs to decide which most profitable payment method. One of the options is a documentary collection (D/C). Below, we will discuss the meaning, advantages, and types of documentary collection.
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What is The Documentary Collection?
Documentary collection is one of the payment methods in export and import. In this payment method, both importer and exporter have their own bank.
In this case, the exporter works with the remitting bank. And the importer with the collecting bank.
The payment process usually starts when the exporter has sent the goods to the ship.
Then the exporter provides the remitting bank with the documents for the shipping and collection orders. After that, the remitting bank takes over the collection of the payments from the collecting bank.
The collecting bank then sends the collection instructions to the importer with details of the fees paid. The importer can pay the bill directly to the collecting bank.
In practice, there are two types of documentary collections. Namely, Documents Against Payment (DAP) and Documents Against Acceptance (DAA).
Documents Against Payment
This payment method is almost the same as the letter of credit. The difference is that the importer does not deposit the money with the bank at the beginning of the transaction.
Moreover, the exporter still has to send all export documents through the exporter’s bank, which are then submitted to the importer’s bank.
However, in this case, the importer’s bank submits the export documents after the importer has made the payment.
D/P payment method is therefore clearly secure, as the importer can not collect the exported goods at the port of destination.
This is because it requires export documents to collect the goods, which can only be collected if you have paid through the specified bank.
But you also need to be careful because the DAP payment method allows importers to cancel orders even though the goods have already been shipped.
Documents Against Acceptance
This payment method is also the same as Documents Against Payment, but there are slight differences.
Documents against Acceptance only require prior payment approval from the importer to obtain all necessary export documents from the exporter.
This agreement is a promise to pay for a specified period, usually 30, 60, or 90 days after approval.
Advantages of Using Documentary Collections
Of course, each payment method has its advantages and disadvantages. Here, the benefit of using D/C are as follows:
1. Lower Costs
The advantage of the first payment method of documentary collection is the cost. The administrative fee can even be cheaper than using a letter of credit. This is because there is less risk for the bank.
2. Has Time Span
Second, after both parties have agreed to the contract arrangement, the bank usually gives a payment term.
This is beneficial because it allows them to expect if there is a discrepancy between the goods and the terms on which they should be delivered.
Disadvantages of using Documentary Collection
There are not only advantages to using the D/C payment method but also disadvantages, including:
1. No Guarantee from The Remitting Bank
Although there is a guarantee from the collecting bank, it turns out that there is no guarantee from the remitting bank. This creates a high risk if the importer suddenly cancels the order.
2. Higher Risk of Exporters Not Receiving Payments
If the importer suddenly cancels the order, this is detrimental to the exporter. Especially if the goods have already been shipped.
Therefore, exporters need to ensure that all goods are following the contents of the applicable documents.