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A documentary collection sits between open account trade and a letter of credit. The exporter's bank sends the shipping documents to the buyer's bank, and the buyer only gets the documents, and with them control of the goods, after paying or after accepting a time draft promising to pay later.
It is cheaper and simpler than a letter of credit, but no bank guarantees payment. This guide explains how documentary collections work, the difference between documents against payment and documents against acceptance, how time drafts fit in, and how exporters can turn an accepted draft into cash.
In a documentary collection, the exporter ships the goods and hands the shipping documents, usually including the bill of lading, commercial invoice and a draft, to its bank with instructions. That bank sends them to a bank in the buyer's country, which releases them to the buyer only on the terms set out in the instructions.
Most collections are handled under the ICC's Uniform Rules for Collections, URC 522. In June 2023, the ICC published version 1.1 of the eURC, a supplement for electronic presentation. A key point under the rules is that the banks act as agents following instructions. They do not guarantee that the buyer will pay.
| Party | Role |
|---|---|
| Principal | The exporter, who ships the goods and starts the collection. |
| Remitting bank | The exporter's bank, which sends the documents and instructions abroad. |
| Collecting bank | The bank in the buyer's country that receives the documents. |
| Presenting bank | The bank that presents the documents to the buyer. Often the same as the collecting bank. |
| Drawee | The buyer, who must pay or accept the draft to receive the documents. |
Banks exchange collection instructions and notices using SWIFT category 4 messages. See our guide to MT400 to MT499 messages.
Documents against payment (D/P). The buyer receives the documents only when it pays. Also called cash against documents (CAD). The exporter keeps control of the goods until it is paid, but if the buyer refuses, the cargo sits at the destination port incurring storage costs and demurrage while the exporter looks for another buyer or ships it back.
Documents against acceptance (D/A). The buyer receives the documents when it accepts a time draft, a legally binding promise to pay on a future date. The buyer gets the goods and credit terms. The exporter gives up control of the goods and relies on the buyer to pay at maturity.
A draft, or bill of exchange, is an unconditional written order from the exporter to the buyer to pay a stated amount. See our page on bank drafts.
A sight draft is payable on presentation. It is used for D/P collections.
A time draft, also called a usance or term draft, is payable at a future date. The tenor is written on the draft, for example "90 days after sight," "120 days after bill of lading date" or a fixed calendar date. When the buyer signs it as "accepted," it becomes a trade acceptance, and the buyer is liable to pay at maturity. The presenting bank usually holds the accepted draft and presents it again for payment on the due date.
Avalisation. The exporter can ask that the buyer's bank adds its aval to the accepted draft, a guarantee that the bank will pay if the buyer does not. An avalised draft is much stronger, and much easier to finance, than a draft accepted by the buyer alone.
Protest. If the buyer refuses to pay or accept, the instructions can tell the collecting bank to have the draft formally protested. In many countries, protest preserves the exporter's legal rights against the buyer, so decide on it before you send the documents.
Avoid "D/P at term" unless you understand it. Instructions that combine a time draft with release of documents only against payment confuse the timing of when the buyer gets the goods. URC 522 discourages collections containing drafts payable at a future date with instructions to release documents against payment. Use either D/P with a sight draft or D/A with a time draft.
| Feature | Documentary collection | Letter of credit |
|---|---|---|
| Bank payment undertaking | None. Banks act only as agents. | Yes. The issuing bank, and any confirming bank, must pay against compliant documents. |
| Main risk for the exporter | The buyer refuses to pay or accept, or fails to pay a time draft at maturity. | Document discrepancies and the issuing bank's credit risk. |
| Cost | Lower. Mainly handling fees. | Higher. Issuance, confirmation and amendment fees. |
| Document checking | Banks check only that the listed documents are present. | Banks examine documents for compliance with the credit under UCP 600. |
| Best suited to | Established relationships and lower-risk buyers and countries. | New buyers, larger amounts and higher-risk markets. |
Non-acceptance or non-payment. Check the buyer's credit and payment history before agreeing to a collection, and consider trade credit insurance for D/A terms.
Loss of control of the goods. Use a full set of order bills of lading and keep them in the banking chain. Never send an original bill of lading directly to the buyer under a D/P collection.
Country and transfer risk. The buyer may be willing to pay but unable to get foreign currency out of its country. Political risk insurance or a bank aval can help.
Unclear instructions. Spell out D/P or D/A, the tenor, who pays bank charges, whether to protest, and what to do with the goods if the buyer refuses them. Most collection disputes start with vague instructions.
An exporter does not have to wait 90 or 180 days for a D/A collection to pay. Common options include an advance against collection from its own bank, discounting the accepted draft, or selling an avalised draft without recourse to a forfaiter. See our pages on forfaiting without recourse and export factoring. The stronger the party that has promised to pay, the cheaper the financing.
Financely is a debt advisory and arranging firm. We don't lend. We help exporters and importers choose between collections and letters of credit, set up collection terms and documents that protect them, and arrange the financing of accepted drafts and collection receivables with lenders and forfaiters from our network of more than 12,700 verified capital providers. See our documentary collections execution service.
Tell us about your buyer, the goods and the payment terms, and we will send you an estimate showing the scope of work and the fee to structure and arrange the financing. You decide whether to proceed once you have seen it.
Under D/P, documents against payment, the buyer gets the documents only after paying. Under D/A, documents against acceptance, the buyer gets the documents after accepting a time draft that promises payment on a future date.
No. Under URC 522, banks act as agents following the exporter's instructions. They do not guarantee payment unless a bank adds its aval to the draft or issues a separate guarantee.
A bill of exchange payable at a future date, such as 90 days after sight. Under a D/A collection, the buyer accepts it in exchange for the documents and becomes legally bound to pay at maturity.
Yes. The exporter can obtain an advance from its bank, discount the accepted draft, or sell an avalised draft without recourse to a forfaiter. Pricing depends mainly on who is liable to pay at maturity.
This article is for general information only and does not constitute legal advice. The rights of the parties depend on the collection instructions, URC 522 where incorporated, and the applicable law on bills of exchange. Financely is an advisory and arranging firm, not a lender or broker-dealer. Any financing is subject to lender underwriting, due diligence, credit approval, documentation and conditions precedent, and no outcome or closing timeline is guaranteed.
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