Documentary collections: D/P and D/A

In a documentary collection, Evelyn ships the goods and hands the shipping documents to her bank. Her bank sends them to a bank in the buyer's country. That bank gives the documents to the buyer only when he pays, or when he signs a firm promise to pay later.

Compare this with the LC from Lesson 1:

• Under an LC, the issuing bank promises to pay if the documents comply. The bank's money stands behind the deal.
• Under a collection, the banks don't promise to pay. They only carry the documents and follow instructions. The money still depends on the buyer.
• Under an LC, banks examine the documents closely. Under a collection, they check that the documents listed have arrived, but they don't examine what the documents say.

So why use it at all? It is cheaper and simpler than an LC, and it still gives the seller some control: the buyer can't easily get the goods without the documents.

Most collections follow an ICC rule book called URC 522. Like UCP 600 for LCs, it applies when the collection says so.

A collection has its own cast, and the names are different from an LC's:

• Principal: the seller who starts the collection. Here, Evelyn.
• Remitting bank: the seller's bank, which receives the documents from her and sends them abroad. Here, Evelyn's bank in Dhaka.
• Collecting bank: any bank, other than the remitting bank, that handles the collection. Usually a bank in the buyer's country.
• Presenting bank: the collecting bank that actually shows the documents to the buyer. Often it is the same bank as the collecting bank, and often it is the buyer's own bank.
• Drawee: the buyer, who is asked to pay or accept. Here, the buyer in Hamburg.

The most important paper in a collection is the collection instruction. Evelyn's bank sends it with the documents. It tells the foreign bank exactly what to do: release documents against payment or against acceptance, who pays the charges, what to do if the buyer refuses, and whether to protest.

Banks act only on this instruction. They don't guess. If something matters to Evelyn, it must be written there.

D/P means documents against payment. In Bangladesh, people often call it CAD, cash against documents. The rule is simple: no money, no documents.

Step by step, in Evelyn's deal:

• Evelyn ships the shirts. The shipping line gives her the bill of lading.
• She gives her bank the documents (bill of lading, invoice, packing list, and so on), usually with a bill of exchange payable at sight, and asks for a D/P collection.
• Her bank (remitting bank) sends them, with the collection instruction, to the buyer's bank in Hamburg.
• The Hamburg bank (presenting bank) tells the buyer: "Documents have arrived. Pay, and they are yours."
• The buyer pays. The bank releases the documents.
• The money travels back to Evelyn's bank, and on to Evelyn.
• With the bill of lading in hand, the buyer claims the shirts from the shipping line.

Why does this protect Evelyn? Because a negotiable bill of lading controls the goods. Without it, the buyer can't normally take delivery. So he has to pay to get the shirts.

D/A means documents against acceptance. Here the buyer doesn't pay at once. He gets time.

Evelyn draws a usance bill of exchange on the buyer, say "pay 90 days after sight". When the documents arrive, the Hamburg bank shows him the bill. He accepts it: he signs on the bill, promising to pay on the maturity date. The bank then hands him the documents, and he takes the shirts.

Usually the accepted bill is held by the collecting bank (or sent back to Evelyn's bank) until maturity. On that date, it is presented to the buyer for payment.

This is great for the buyer: he can sell the shirts first and pay later. But look at what Evelyn has given away:

• The buyer has the goods.
• Evelyn has only a signed promise from the buyer, not from any bank.
• If, on the maturity date, the buyer doesn't pay, Evelyn can't take the shirts back. Her choices are to wait, negotiate, or go to court abroad.

So D/A is close to open account, with one extra thing: a signed bill of exchange, which is stronger legal evidence of the debt than an unpaid invoice.

In a collection, the seller carries the risk. What can go wrong?

• The buyer refuses to pay (D/P) or to accept (D/A), perhaps because the market fell.
• The goods sit at a foreign port. Port storage and container charges add up every day. Evelyn must find another buyer, sell at a loss, or pay to ship the goods home.
• Banks won't look after the goods, unless they agree to. They handle documents.

How can Evelyn protect herself?

• Ship under a full set of negotiable bills of lading made out to order, so the buyer can't take the goods without the documents. Air cargo is different. An air waybill is not a document of title. If it names the buyer as consignee, the airline can release the goods to him without any bank papers, so he may collect them without paying. Goods can be consigned to the collecting bank instead, but only if that bank agrees first.
• Write clear instructions: what to do if the buyer refuses, and whether to protest. Banks protest only if the instruction says so.
• Name a trusted case-of-need agent in the buyer's country.
• Consider export credit insurance, or ask for the buyer's bank to guarantee the accepted bill.

Collections suit a trusted buyer in a stable country. In Bangladesh, exports on CAD or DA terms need extra care from the exporter's bank: checking the buyer's standing and making sure the money comes home on time under the export rules.