Collection refers to a payment method in which the seller, i.e. the creditor, issues a bill of exchange and entrusts a bank to collect payment from the buyer, i.e. the debtor, in cross-border business.
Collection involves four parties: the principal, the payee, the collecting bank and the collecting bank.
Collection methods can be divided into clean collection and documentary collection according to whether the bill of exchange is accompanied by shipping documents.
(1) Clean collection.
Clean collection refers to the seller collecting payment only with the bill of exchange without any shipping documents. This method is generally used for small settlements such as settlement of balances under letters of credit, advance payment, commissions and sample fees.
(2) Documentary collection.
Documentary collection refers to the collection of financial documents attached with commercial documents or commercial documents only to the collecting bank by the principal. In cross-border business, when parties adopt the collection method, documentary collection is mostly adopted. In the case of documentary collection, according to the different conditions of the principal’s delivery of documents to the collecting bank, documentary collection can be divided into two types: D/P and D/A.
① Documents against Payment (D/P) refers to a settlement method in which the collecting bank can only deliver commercial documents to the buyer after the buyer has paid the full amount of the goods. As a type of collection business, D/P is divided into two basic transaction types, D/P at sight and D/A at a later date.
② Documents against Acceptance (D/A) refers to the seller’s delivery of documents subject to the buyer’s acceptance, that is, the buyer can receive the shipping documents after accepting the bill of exchange and pay when the bill of exchange expires.
The advantages of collection are simple procedures, quick collection and low cost, but for the seller, there are certain risks in collecting the exchange. Because although the collection is handled by the bank, the bank only acts according to the buyer’s instructions and does not bear the responsibility of payment. Whether the payment can be recovered depends entirely on the buyer’s credit. This payment method is very likely to cause the buyer to delay going to the bank to pay the bill after the goods arrive, and refuse to pay the seller, causing losses to the seller.