How Documentary Collection (D/P) – Documents Against Payment is used as a Method of Payment in Trade (Video)

 

Under Documentary Collection method – there is sight and usance collection. For sight documentary collection it’s called  DP (or Documents Against Payment),  for usance it’s called DA (or Documents Against Acceptance).

In this video we shall look at the DP method.

1.     In this presentation on Documentary Collection, we have the exporter (also known as Principal) and the importer (also known as Drawee).  Both of them entered into a sales contract whereby they agreed that method of payment will be by sight Documentary Collection Method ie DP or Document against Payment.

2.     Once the contract is signed, the exporter will ship out the goods to the importer through the shipping agent.

3.     After the exporter shipped out the goods, the exporter will prepare the necessary trade documents and this includes Bills of Lading and Sight Bill of Exchange.

The exporter will then prepare a cover letter which is also known as a Collection Instruction containing complete and precise instructions.  The Collection Instructions form is normally prepared on a standard format given by the bank.

The exporter will then forward all the trade documents as detailed in the Collection Instruction to his bank, the Remitting Bank in this case – ABC Bank. Basically, the Exporter is informing the Remitting Bank that he had shipped goods to the Importer. And the Exporter has wants the Remitting bank to send all the trade documents over to the importer and to collect payment on his behalf. So this is why this method of payment is also known as collection method.

4.     So now the trade documents are with the Remitting bank. The remitting bank also prepares its own Collection Instruction.

5.      Whatever instructions given by the Exporter in his Collection Instruction will be transferred over to the Remitting Bank’s Collection Instruction.

6.     The Remitting Bank will then forward all the documents to the  Collecting/Presenting Bank. Normally there are 2 banks here – the collecting bank is the remitting bank’s agent whereas the presenting bank is the importer’s bank. For simplicity sake in this diagram, both banks are placed into the same box.

So when the documents arrive at the Collecting/Presenting Bank, the Collecting/Presenting bank will then inform the importer to make payment in order to collect the documents.

7.     Here the importer has paid the Collecting/Presenting Bank.

8.     The Collecting/Presenting bank released the trade documents to the importer.

9.     The Collecting/Presenting bank subsequently remit payment to the Remitting bank.

10.  When the Remitting bank received the payment, the Remitting bank will credit the payment to the exporter’s account. In the meantime, the goods has arrived at the port, and with the trade documents the importer will be able to clear the goods from the port.

This entire transaction is governed by the Uniform Rules for Collection URC522 published by the International Chamber of Commerce.

So this is in essence the workflow of a Documents Against Payment  method.

 

How a Sight Letter of Credit works in International Trade (Video)

 

Understand How a Sight Letter of Credit works in International Trade

Methods of Payment in International Trade (Video)

 

In International Trade, there are 2 parties involved which are the exporter and the importer. From the Exporter to Importer, there are movement of goods and shipping documents. From the Importer to Exporter, there are movement of money. From these 3 movements of goods, shipping documents and money, there are 4 methods of payment which are

·      Open account

·      Advance payment

·      Documentary Collection

·      Documentary Credit

We shall look at each of these methods of payment in more detail.

Open Account

First of all there is a sales contract between the exporter and the importer.

1.     Once the contract has been signed the exporter will then ship out the goods to the importer.

2.     The exporter then prepares relevant shipping documents like bill of lading, invoice and packing lists and will courier these documents direct to the importer. So once the importer receives the documents and when the goods arrive at the port, the importer will be able to clear the goods from the port .So the goods are available to the importer before payment.And, is there any risk to the importer? Certainly none.

3.     Once the importer has received the goods, the importer will then make payment to the exporter.The timing of the payment will depend on the sales contract, and there is certainly risk to the exporter to ship the goods first before receiving payment.

So this is the situation where the exporter needs to rely on the importer to pay as agreed and for this to work the exporter needs to know and trust the importer very well.

So this is the essence of open account. Now let us look at what is advance payment

Advance Payment

Advance payment is the direct opposite of open account. First of all there is a sales contract which mentions that advance payment is the method of payment.

1.     Once the contract is signed the importer will make payment to the exporter. The time of payment is before shipment and is there any risk to the exporter? Certainly none. Because the exporter has received payment first.

2.     So after the exporter has received payment, the exporter will then ship out the goods

3.     After shipment of goods, exporter will prepare the relevant shipping documents which the exporter will courier directly to the importer. When the importer receives the documents, the importer will be able to clear the goods from the port. The goods are available to the importer only after payment. The risk is to the importer is that the importer would have to rely completely on the exporter to ship out the goods as ordered

For this method to work, the importer must know and trust the exporter, so this is in essence advance payment

Documentary Collection Method

We have a problem, the exporter is new to the importer and the importer is new to the exporter and there is no trust between both of them so the exporter will certainly want advance payment and the importer will want open account.

They cannot compromise so they need the bank to come into the picture

For this the bank had invented 2 methods to solve the problem: documentary collection method as well as documentary credit method

Under documentary collection method – you have got sight and usance. For sight documentary collection it’s called DP,for usance it’s called DA. DP means documents against payment and DA means documents against acceptance.