In the first part of the article, we reviewed simple payment and collection methods. Let us now look at documentary methods and the most representative ones.
DOCUMENTARY PAYMENT METHODS
These are considered documentary when, in order to process collection, the commercial documents related to the shipment of goods are sent, and these may also be accompanied by a financial document (usually a bill of exchange) to be paid and/or accepted when the documents are released.
Documentary payment methods:
- Documentary payment order
- Documentary collection
- Documentary credit
DOCUMENTARY PAYMENT ORDER
In this method, the payment order is conditional upon the seller delivering certain documents representing the goods.
It is not very common and is considered a hybrid payment method between a documentary credit and a simple payment order. Unlike other payment methods, it does not have detailed international rules regulating how it works and the obligations of the parties.
Advantage for the exporter: they do not have to ship the goods before the payment order is issued, and they have certainty of collection once shipment takes place.
DOCUMENTARY COLLECTION
This consists of the seller instructing a bank to manage the collection of the sale. The instruction is usually accompanied by documents, which are released to the buyer according to the instructions given.
In Spain, this is calledRemesaand in Latin AmericaCobranza(collection).
Depending on the payment timing, they may be:
- Payable at sight
- Payable at term
- Without bank guarantee
- With bank guarantee
- Payable againstTrust Receipt¹ (used in agro-food exports to the USA)
DOCUMENTARY CREDITS
This is the order an importer gives to their bank so that, either directly or through another bank, it proceeds with payment once the exporter’s bank presents documents proving that the goods have been shipped as agreed.
The importer’s bank will pay if the documents are in order, regardless of whether the importer has sufficient funds at that moment. In other words, the importer’s bank guarantees the transaction.
There are several types of documentary credits:
- Revocable or irrevocable
- Revocable: after opening and before payment, the importer may cancel it at any time at their own discretion.
- Irrevocable: once opened, it cannot be canceled, which guarantees the exporter that if the submitted documents are correct, they will receive payment.
- Confirmed or unconfirmed
- Confirmed: a third bank guarantees payment performance.
- Unconfirmed: the third bank assumes no commitment.
- At sight or at term
- At sight: payment is made immediately upon presentation of documents.
- At term: payment is deferred.
The safest of all is theirrevocable, confirmed, at-sight documentary credit.
Source: ICEX
¹ A document signed by an individual or legal entity (buyer/importer) who receives goods “in trust” through commercial documents entrusted by their bank, following instructions from the exporter’s bank, so that they can clear the goods through customs.
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