Introduction to Documentary Collections Trade Finance in the Spotlight

Summary

The video explains the complexities of cross-border business transactions, focusing on the use of documentary collections as a payment mechanism. It highlights the exchange of critical documents like the commercial invoice and bill of lading between buyers and sellers, facilitated by banks. The video also distinguishes between two types of documentary collections: documents against payment and documents against acceptance. It discusses the risks and benefits for both parties, including potential disputes, non-payment, and the role of the buyer's bank in mitigating risks. Proper documentation is essential to avoid confusion and ensure smooth transactions.

Takeaways

• 🌐 Cross-border business involves complex logistics and documentation.
• 📄 Documentation is crucial for the buyer to gain possession of goods and for payment exchange.
• 💼 Documentary collections act as intermediaries for document exchange and payment.
• 🏦 Banks act as collection agents without assuming commercial or country risk.
• 🔑 Documents typically include commercial invoices, bills of lading, and customs clearance papers.
• 💵 There are two types of collections: documents against payment and documents against acceptance.
• 🛂 Documents against payment require the buyer to pay before receiving documents.
• 📦 Risk of goods being stored at the port if the buyer refuses or fails to pay.
• 📋 Documents against acceptance allow the buyer to take delivery on accepting a bill of exchange.
• 🏢 Avalization strengthens the seller's position by requiring the buyer's bank to co-accept the bill of exchange.
• 📈 Buyers face risks of receiving damaged or incorrect goods or customs issues.
• 🔍 Sellers can mitigate non-payment risk with documents against payment and title documents.
• 📑 Awareness of local rules and regulations is essential for both buyers and sellers.

Q & A

What is the main logistical challenge in cross-border business?

Cross-border business involves more than just logistical challenges; it requires extensive documentation that the seller prepares or obtains, which the buyer needs to take possession of the goods.

What role do banks play in documentary collections?

In documentary collections, banks act as collection agents. They are entrusted with delivering documents to the buyer only after the seller’s collection instructions are fulfilled. However, the bank does not assume responsibility for payment or commercial risks.

What types of documents are typically included in a documentary collection?

Documents typically include a commercial invoice, bill of lading, and other necessary papers required for customs clearance and the collection of goods.

What are the two types of documentary collections?

The two types of documentary collections are: documents delivered against payment and documents delivered against acceptance.

What is the risk for the seller in a 'documents against payment' scenario?

The risk for the seller is that the buyer may refuse or fail to pay. In such cases, the buyer won’t receive the documents, and the seller may need to store and insure the goods at the port while resolving the dispute.

Why is control over goods more challenging with air shipments compared to ocean shipments?

Control is more challenging with air shipments because an air waybill is not a title document, unlike a bill of lading used in ocean shipments.

What is the benefit for the seller under 'documents against acceptance'?

Under documents against acceptance, the buyer takes delivery of the goods upon accepting a bill of exchange, which serves as evidence of debt. This reduces the risk of storing goods at the port due to disputes.

What is 'Avalization' in the context of documentary collections?

Avalization occurs when the seller requires the buyer’s bank to co-accept the bill of exchange, ensuring that the buyer’s bank pays the seller at maturity, even if the buyer is unable or unwilling to pay.

What are the main risks for the buyer in a documentary collection trade?

The buyer risks receiving goods that are damaged, incorrect, or held by customs, as they only see the goods after making payment or accepting the bill of exchange.

What steps can the buyer take to mitigate the risk of receiving faulty goods?

The buyer can appoint a third party to inspect the goods prior to making payment or accepting the bill of exchange, with prior agreement from the seller.

Outlines

00:00

📜 Understanding Documentary Collections

This paragraph discusses the complexities of cross-border business beyond mere logistics, emphasizing the importance of documentation. Sellers prepare documents required by buyers for merchandise possession. The exchange of documents for payment is central to this process, with intermediaries facilitating this exchange, often providing financing. Documentary collections are detailed, with the bank acting as a collection agent without assuming payment responsibility. Two types of collections are highlighted: documents against payment, where buyers must pay before receiving documents, and documents against acceptance, allowing buyers to receive goods upon accepting a bill of exchange. The paragraph also introduces the concept of 'avalization', where the buyer's bank co-accepts a bill of exchange, shifting risk from the buyer to the bank.

05:00

💼 Risks and Benefits in Documentary Collections

Paragraph 2 delves into the risks and benefits associated with documentary collections for both buyers and sellers. For buyers, the process is more cumbersome than open account trading, with the risk of receiving damaged or incorrect goods only after payment or bill acceptance. Sellers, on the other hand, face the risk of non-payment, which is mitigated when using documents against payment, especially with a title document like a bill of lading. The paragraph also discusses the seller's country risk and the importance of assessing this before transactions. It concludes with the significance of understanding local rules, the cost implications of documentation preparation, and the necessity of accurate documentation to prevent disputes.

Keywords

💡Documentary Collection

A documentary collection is a payment mechanism where documents required for the release of goods are sent through banks, and the buyer must meet certain payment conditions to receive them. It is central to cross-border business, as described in the video, where documents are exchanged for payment, reducing risk compared to open account trading.

💡Documents Against Payment (D/P)

Under Documents Against Payment (D/P), the buyer is required to make payment before receiving the documents from the bank. This method ensures that the seller retains control over the goods until payment is made. The video highlights this process as one way to mitigate the risk of non-payment, but it can lead to logistical challenges if the buyer refuses to pay.

💡Documents Against Acceptance (D/A)

Documents Against Acceptance (D/A) allows the buyer to receive documents and take possession of the goods after accepting a bill of exchange. This bill represents the buyer's commitment to pay at a later date. While D/A offers more flexibility to the buyer, it exposes the seller to the risk that the buyer might not honor the bill on its maturity date.

💡Bill of Lading

A Bill of Lading is a document of title that is central to ocean shipments. It serves as proof of shipment and ownership of the goods. In the video, it is emphasized that the seller can retain control over the goods by holding onto the Bill of Lading until payment is made, preventing the buyer from accessing the goods prematurely.

💡Air Waybill

An Air Waybill is similar to a Bill of Lading but is used in air shipments. However, unlike a Bill of Lading, it does not serve as a document of title. The video explains that sellers cannot control the goods in air shipments in the same way they can with ocean shipments, which increases the seller's risk.

💡Collection Agent

A collection agent, in the context of documentary collections, refers to the bank acting as an intermediary between the seller and the buyer. The bank ensures that the buyer receives the documents only after fulfilling the seller's collection instructions, though it assumes no risk of payment or commercial disputes.

💡Bill of Exchange

A Bill of Exchange is a negotiable instrument that requires the buyer to pay a specified amount on a future date. In documentary collections, particularly under Documents Against Acceptance (D/A), it is used as security for the seller, who holds this bill in case of disputes. The video mentions that the risk remains if the buyer refuses to honor it on maturity.

💡Avallization

Avallization is the process by which the buyer’s bank co-accepts the Bill of Exchange, providing the seller with added security. In the video, it is presented as a way for the seller to reduce risk, as the buyer's bank guarantees payment even if the buyer defaults, shifting the risk to the bank instead of the buyer.

💡Commercial Invoice

A commercial invoice is one of the key documents in a documentary collection. It provides details about the transaction, including the price, quantity, and description of the goods. This document is crucial for customs clearance and for the buyer to gain possession of the merchandise. The video emphasizes the need for accurate documentation to avoid disputes.

💡Country Risk

Country risk refers to the potential for loss due to economic or political instability in the buyer's country. The video stresses the importance of assessing this risk in international transactions, as sellers may face difficulties in receiving payments if the buyer’s country undergoes financial crises, sanctions, or other disruptions.

Highlights

Cross-border business involves both logistical challenges and documentation, which is essential for buyers to gain possession of goods.

The exchange of documents for payment creates a middle ground between open account and prepayment, often involving intermediaries.

In a documentary collection, banks act as collection agents but assume no commercial risk or responsibility for payment.

Documents against payment require buyers to pay before receiving the goods, often involving title documents like a bill of lading.

A key risk for sellers is that buyers may refuse to pay, forcing the seller to store and insure the goods while disputes are resolved.

Air waybills are not title documents, so sellers lose control over goods when shipping by air, unlike with ocean shipments.

Documents against acceptance allow buyers to take goods after accepting a bill of exchange, but sellers still face non-payment risks.

Avilization strengthens sellers' positions by requiring the buyer's bank to co-accept the bill of exchange, reducing the risk of non-payment.

Using documentary collections can be more burdensome for buyers than open account trading, as they only see goods after payment or acceptance.

Buyers may face risks like receiving damaged or incorrect goods, and goods being held at customs, when using documentary collections.

Sellers prefer documents against payment over documents against acceptance as it offers greater control over goods via title documents.

Even with documents against acceptance, sellers face risks of non-payment, which can be mitigated by involving the buyer's bank through avilization.

Sellers must assess country risks related to the buyer's jurisdiction before entering a transaction to mitigate potential non-payment risks.

Local rules, such as stamp duty on bills of exchange, can affect the transaction cost, and both parties need to be aware of applicable regulations.

Proper negotiation of terms and careful preparation of documents are crucial to avoid confusion and disputes in documentary collection processes.

Transcripts

doing cross-border business is more than

just a long-distance logistical

challenge it also involves documentation

documentation that the seller of the

goods prepares or obtains and that the

buyer of the goods requires in order to

gain possession of that merchandise

cross-border buying and selling of goods

revolves around exchanging these

documents for payment which in turn

opens up a middle ground between open

account and prepayment a space where

intermediaries conduct the exchange of

documents for payment and may even

provide necessary financing documentary

collections as a payment mechanism is

used in these circumstances in a

documentary collection scenario

documents are entrusted to a bank for

delivery to a buyer only after the

sellers collection instructions are met

typically these documents include the

commercial invoice the Bill of Lading

and other necessary papers required for

customs clearance and the collection of

goods the bank acts here as a collection

agent ie it does not assume any

responsibility for payment

neither the commercial risk associated

with the buyer North the risks

associated with the buyers country are

mitigated we will cover these risks in a

later episode of trade finance in the

spotlight documentary collections can be

one of two types documents delivered

against payment for documents delivered

against acceptance in this section we

will discuss documents delivered against

payment under the terms of documents

delivered against payment the buyer is

required to pay prior to receiving

documents from the bank the documents

will typically include a document of

title such as a bill of lading

from the sellers perspective there is a

risk that the buyer will refuse or fail

to pay in that case the buyer will not

receive documents from the bank and

usually be unable to take delivery of

the goods meaning the goods will need to

be stored and insured at the port while

the dispute between the parties is

resolved

the ability of the seller to exercise

control over title to the goods depends

on having a title document such as an

original bill of lading as in most ocean

shipments which is released to the buyer

only after they have made payment this

control is not available when making air

shipments because an air waybill is not

a title document the second type of

collection is documents against

acceptance under the terms of documents

against acceptance the buyer is able to

take delivery of the goods on acceptance

of a bill of exchange which evidence is

their debt to the seller so the risk of

a dispute resulting in the need to store

goods at the port is reduced compared to

collection against payment

although the buyer could refuse to take

delivery of the goods for other reasons

in contrast to open account trading the

seller does at least hold an accepted

bill of exchange as security although

the via holds possession of the goods

while the seller should be able to

anticipate the collection of funds on

the maturity date of the accepted bill

of exchange there is still a risk the

buyer will refuse to one of the bill of

exchange on maturity in these

circumstances the seller may need to

pursue payment through the courts in the

buyer's jurisdiction another concept in

collection is called

eval ization it is possible for the

seller to strengthen its position under

documents against acceptance by

requiring the buyers bank to Co accept

the bill of exchange this is called

Avila's a ssin this concept is called

documents against acceptance pore

evolved under Avila zation the buyers

bank is required to Co accept the bill

of exchange before documents are

released to the buyer under these

circumstances

the buyers fact must pay on the maturity

of the bill of exchange even if the

buyer is unable or unwilling to pay

therefore the seller is exposed to the

buyers bank risk instead of the buyers

risk

in this section we will discuss risks

and benefits to the buyer and a

documentary collection trade using

documentary collections is slightly more

burdensome for the buyer compared with

open account trading the buyers main

risks are that they get to see the goods

only after affecting payment or

accepting a bill of exchange

therefore they are open to risk of

receiving goods which are damaged during

shipment or that the shipment is

incorrect or that the goods are held by

customs the buyer may be able to appoint

a third party to inspect the goods prior

to making payment or accepting the bill

of exchange with prior agreement of the

seller such agreement must be included

in the terms of the collection as with

open account trading the buyer can still

defer payment using the seller as a

source of finance by using documents

against acceptance rather than documents

against payment in this section we will

discuss risks and benefits to the seller

and a documentary collection as with

open account trading the exporter faces

a risk of non-payment by the buyer after

the delivery of the goods using

documents against payment as the

preferred type of collection offers the

seller greater protection than documents

against acceptance especially when a

document of title such as a bill of

lading is included in the documentation

this is because the seller can still

exercise control over the goods and can

either find another buyer or arrange to

have them returned

in the case of documents against

acceptance the seller faces a risk of

non-payment by the buyer on the maturity

date of the bill of exchange this can be

mitigated by requesting the buyers bank

to realize the bill of exchange the

seller also faces the country risk of

the buyer it is important for the seller

to assess this risk prior to entering

into the transaction in this section we

will review documents and their

associated rules it is crucial for the

seller and buyer are aware of the

appropriate local rules which may apply

to their transaction for example some

countries apply stamp duty on bills of

exchange so it is important to factor

the additional cost into any pricing

requirements for export or import

licenses should also be considered

preparation of the documentation is

central to the documentary collection

process negotiation of terms whilst the

transaction is being agreed will ensure

the documentation is as accurate as

possible reducing the risk of confusion

or dispute later this may add cost to

the procurement process as resources

need to be committed to the scrutiny and

preparation of appropriate documents