Documentary collection / Cash against documents / CAD

The documentary collection one of the payment solutions often used in contracts for international trade transactions.

In this payment solution, the seller instructs his bank to collect the consideration for the export goods from the buyer against the documents specified in the sales contract. 

When choosing this solution, it is important to know that the international customs established in relation to direct debits are recorded in the uniform regulations of the International Chamber of Commerce (ICC). The most recent version of the standard is entitled Uniform Rules for Collection (ICC URC 522). Banks around the world act accordingly in matters related to documentary direct debits, taking into account the content of the direct debit order and local banking customs. 

As a buyer, choosing a documentary collection direct debit can be beneficial, due to the following 

a) the consideration for the imported goods must be paid only after the delivery of the goods, 

b) the costs of the participating bank/s are usually borne by the contractual partner, 

c) the payment method is also initiated by the seller. 

As an exporter, however, this is a worse solution than when we sell against a letter of credit. However, even as an exporter, the documentary collection is safer than the so-called open delivery. 

It is important to know that this payment technique also involves risks, since only the buyer promises to pay in the sales contract, so we can be uncertain whether our buyer fulfills his obligation to receive goods and pay until the payment date fixed in the contract. 

At the same time, we can enjoy the advantages of the documentary debt collection compared to the letter of credit. In the case of documentary debt collection, the regulations regarding the payment documents to be submitted are less strict than in the case of a letter of credit, so the time and energy needed to compile the document package is lower and the payment risk due to incorrectly issued documents is less.

A documentary direct debit has a minimum of three, but usually four, participants: 

a) the ordering seller (principal), who gives his bank a collection order and who bears the arising bank costs, 

b) the bank participating in the collection, which is directly or 

c) through its correspondent partner in the buyer's country, as a so-called sending bank, prompts the buyer to pay. In the latter case, the so-called payee bank executes the direct debit order, and finally 

d) the buyer, who is the drawee of the direct debit order.

Weighing the risks, it is decided during negotiations whether we agree with our business partner on the linked or open version of the documentary collection. The choice is primarily determined by the risks associated with the customer's creditworthiness (readiness and solvency) and the closeness of the business relationship. 

The difference between the two types is significant: can the buyer access the goods before or after payment. (Linking means: binding to something; here: delivery of goods is tied to payment.) 

It is also decided during negotiations whether the business partners agree on the spot payment (D/P - payment against documents) or later payment (D/A - payment against acceptance) version of the documentary collection.