Document Collection Method- D/P and D/A
When International Trade takes place between Importer and Exporter and they do not know each other then a trust issue plays an important role. Exporter is not sure whether they will be able to realise export proceeds if they dispatch goods before getting payment. Similarly, Importer also is not assured of getting delivery of goods if they make payment prior to dispatch of goods. In this case there can be two to three ways through which payment can be paid or received.
1. Documentary Credit or Letter of Credit
Documentary Collection Method
2. Document against Payment (D/P) – i.e., on sight bill of exchange
3. Document against acceptance (D/A)- i.e., after agreed credit period (usance bill) bill of exchange
Here I will discuss documentary collection method along with process flow.
Flow Chart- Document Collection Method- Document against Payment
Document against Payment: – Documents against payment require the importer to pay the face amount of the draft at sight. In other words, the payment must be made to the bank when the buyer is presented with the draft, and before any shipping documents are released
Document against Acceptance: – Documents against acceptance require the importer to pay on a specified date. Once the buyer accepts the time draft, the bank releases the documents to the buyer.
Difference between Document against Payment (D/P)and Document against Acceptance (D/A)
Both DA and DP are the terms of payment related to acceptance of shipping documents pertaining to each consignment from buyer’s bank. Under a DA term of payment, importer accepts documents on the basis of an assurance to effect payment by accepting necessary bill of exchange. The importer collects shipping documents required to take delivery of imported goods from his bank after such assurance on payment at mutually agreed maturity date of payment.
In a DP payment terms, the imported need to effect payment against respective import consignment, before collecting documents for delivery of imported goods. Under a payment terms – Documents against Payments, the bank delivers documents required for import clearance only after receiving the value of goods from the importer. The buyer takes delivery of goods with the original transport document of title delivered by his bank after effecting payment under sale of goods mentioned in the document. The buyer’s bank in turn, sends the said amount to seller’s bank as per banking procedures and formalities under international trade.
Process followed in Documents against Payment (D/P)
1. Sales Contract: This is the first step followed by the exporter and importer. Both exporter and importer will sign sales contract defining the terms of payment against shipment of goods.
2. Goods dispatch: Based on sales contract the exporter will dispatch of goods to importer.
3. Export Documents: Exporter will prepare export documents i.e., Bill of Exchange (at sight) , Bill of lading, commercial invoice, packing list, import manifest, as and when goods are shipped. All documents are required to be submitted to exporter’s bank i.e., remitting bank. Basically exporter will rely on remitting bank.
4. Documents to Collecting Bank: The remitting bank will check entire set of documents and pass the instruction to collecting bank or presenting bank who is in importer’s country. The collecting bank or presenting bank can be a branch or associate of remitting bank. The presenting bank can be separate or collecting bank and presenting bank can be same.
5. Payment from Importer: When the goods arrive, meanwhile, goods also arrive at the port. Goods arrive at the port but not to importer. The importer will get delivery of goods when he will present the documents.
The term of payment under Document against payment (D/P) is “at sight” that means importer has to pay first. Importer will go with document against payment when he does not want credit period.
6. Documents to importer: The collecting bank will present documents to importer post receipt of import payment.
7. Goods received: After presenting corresponding documents to customs, he will be able to release goods from port.
8. Transfer of payment by the collecting bank to remitting bank: Post receipt of goods collecting bank will transfer proceeds to remitting bank.
9. Final settlement of export bill: On receipt of collection from collecting bank remitting bank will transfer the same to the exporter.
Process followed in Documents against Acceptance (D/A)
In case of document against payment the term of payment was “at sight” but in case of document against acceptance there will be credit period to be mentioned on Bill of exchange. The process followed from serial number 1 to 4 and 8 to 9 in case of document against payment will remain same in case of Document against Acceptance.
5. Payment from Importer: When the Bill of exchange (usance) will be signed the importer will make payment as and when credit period is over.
For example, if the Bill of exchange is signed for 90 days, post signing of Bill of exchange the importer will make payment to exporter after 90 days.
6. Documents to importer: Once importer sign the Bill of exchange the collecting bank will hand over entire set of documents to importer for release of goods from customs.
7. Goods received: After goods will be handed over, the importer will present them at the port for receiving. When the goods will be received the importer will send goods to his retailers because he doesn’t require to ettle the export bill immediately. When he will send goods, he will start receiving collection against those but the credit period set by the importer to retailers should be less than the credit period which he agreed with exporter. After receiving collection from retailers, he will make payment to his banker i.e., collecting bank after or on the due date
Author Bio
Under D/A
What should the seller do when it is already due, but the customer said that they have not received the product yet, due to shipment delay, so they unable to pay. is this an excuse?