Advantage and Disadvantage of Documentary Collection

Sometimes, a seller may offer a buyer a payment method that is suitable for the international trade situation. One popular payment method is Documentary Collection or cash against payment, which is guided by the International Chamber of Commerce through its publication no. 522.

URC 522 defines a collection as banks handling documents according to instructions to obtain payment and/or acceptance, deliver documents against payment and/or acceptance, or deliver documents on other terms and conditions.

The use of Documentary Collection for international trade settlement has advantages and disadvantages:

1- A disadvantage of Documentary Collection:

- The security of payment for the seller is less than payment in advance, a bank payment obligation or documentary credit.

- The seller does not have the benefit of a bank guarantee of payment provided by a documentary credit and relies only upon the credit standing of the drawee/buyer.

- Should the collection be unpaid, the costs of protecting the goods can be high. Finding an alternative buyer, willing to pay a fair price, in a far country, may be difficult, particularly for perishable goods.

2- Advantage of Documentary Collection:

- Increase the likelihood of payment for the seller, as the buyer may not be able to obtain the goods without payment or acceptance of the collection;

- Provide some assurance to the buyer that the shipment will arrive, although the buyer will often not be able to examine the goods before payment or acceptance of the collection;

- Provide an opportunity to sell goods on, before payment has to be made (under a D/A transaction).

In conclusion, the use of documentary collection in international trade has both advantages and disadvantages. The parties involved in a documentary collection transaction must carefully consider these advantages and disadvantages before proceeding with this method of payment.

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