What is a Bill for Collection?
- The concept of ‘collection’ is a compromise between:
- (a). Open Account Trading
- Favours the buyer/importer who usually pays after he receives the goods, reducing the debit balance of his account with the seller/exporter according to arrangements established between themselves
- (b) Payment in advance
- Favours the seller/exporter who receive payments before he ships the goods
Trade settlement by collection reduces
- risk to both importer and exporter
- delay in receipt of payment by exporter
By using banks as intermediaries to ‘collect’ payment from the importer for goods which the exporter has already sent.
- Bill of Exchange/Draft with NO commercial documents attached.
- A) the cost of goods, in which case the documents of title would have been sent direct to the importer.
- B) the cost of service, such as the use of a tugboat to bring a ship into harbour, when no documents are required.
- Ordinary cheques which the bank sends for collection come under this category, and are usually processed by the Remittances Department.
Bill of Exchange/Draft with Shipping Documents etc.
- the attached documents include the document(s) of title – (Bill of Lading) which the importer needs to clear the goods.
Documentary Collection (another type):
- Shipping documents etc. but NO Bills of Exchange/Draft
Some countries impose stamp duty on Bills of Exchange/Draft and this may be avoided by not issuing one! The importer still has to pay against the amount stipulated in the collection order. The importer may have to present a promissory note or post dated cheque in exchange for the documents.
Whichever documents the exporter presents to his bank, he always attaches his instructions on a COLLECTION ORDER. These instructions are passed on to the importer telling him how and when to pay.
What are D/P and D/A terms?
The exporter will ask the importer to settle the bill in one of the two ways:-
- D/P: DOCUMENTS AGAINST PAYMENT (or Cash against Documents/Cash on Delivery).
- D/A: DOCUMENTS AGAINST ACCEPTANCE.
Guideline for Documentation under Collections (both import and export)
- Are the Covering Schedule Instructions clear?
- Are the documents listed in the cover schedule are received and the count of each documents are correct?
- Is there any interest for usance period to be collected and the rate of interest are given in the cover schedule?
- In case of non-payment for inward collections, Noting and Protest need to be done?
- Transport documents are properly endorsed?
- Any avalization of Draft(s)/Bills of Exchange are request (for Documents Against Acceptace)?
- What are the Risks involved for Banks for avalization of Bill of Exchange?
Avalization of Bills of Exchange
What is Avalization?
Exporters may require a third party, usually a bank, to guarantee payment of a bill of exchange drawn on an importer under a trade contract. This action is known as an “avalization” and can be provided on behalf of the exporter upon request. By endorsing the bill on the back, the bank commits itself unconditionally to pay should the drawee default
An “avalized” bill substitutes the bank’s risk for the importers risk thus providing the exporter with assurance that payment will be met.