Discuss documentary collection as a method of international sourcing

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To collect payment from a foreign buyer using documentary collection, the seller
sends a draft or other demand for payment with the related shipping documents
through bank channels to the buyer's bank. The bank releases the documents to the
buyer upon receipt of payment or promise of payment. The banks involved in
facilitating this collection process have no responsibility to pay the seller should the
buyer default unless the draft bears the aval (ad valutem) of the buyer's bank. 5 It is
generally safer for exporters to require that bills of lading be "made out to shipper's
order and endorsed in blank" to allow them and the banks more flexible control of the
merchandise.
Documentary collection carries the risk that the buyer will not or cannot pay for the
goods upon receipt of the draft and documents. If this occurs it is the burden of the
seller to locate a new buyer or pay for return shipment. Because the bill of lading for
ocean freight is a valid title to the goods and is a negotiable document whereas the
comparable airway bill is not negotiable as an ownership title, documentary
collections are only viable for ocean shipments.

Drafts
A draft (sometimes called a bill of exchange) is a written order by one party directing
a second party to pay a third party. Drafts are negotiable instruments that facilitate
international payments through respected intermediaries such as banks but do not
involve the intermediaries in guaranteeing performance. Such drafts offer more flexibility than LCs and are transferable from one party to another. There are two
basic types of drafts: sight drafts and time drafts.

Sight Draft
After making the shipment the seller sends a sight draft, through his bank to the
buyer's bank, accompanied by the agreed upon documentation such as the original
bill of lading, invoice, certificate of origin, phytosanitary certificate, etc. The buyer is
then expected to pay the draft when he sees it and thereby receive the
documentation that gives him ownership title to the goods that were shipped. There
are no guarantees made about the goods other than the information about
quantities, date of shipment, etc. which appears in the documentation. Of course,
could refuse to accept the draft thereby leaving the seller in the unpleasant position
of having shipped goods to a destination without a buyer. It is then the seller's
responsibility to find a new buyer, dispose of the goods, or arrange that they be
shipped back. There is no recourse with the banks since their responsibility ends
with the exchange of money for documents.

Time Drafts
A time draft or date draft is similar to a sight draft except that it demands payment
after a specified time or on a certain date after the buyer accepts the draft and
receives the goods. By signing and writing "accepted" on the draft, the buyer is
contractually obligated to pay as directed on the draft. Again, the bank does not
guarantee this payment and a buyer can put off payment by delaying acceptance of
the draft. In most countries, an accepted time draft is legally stronger evidence of
debt than an unpaid invoice.

Titany answered the question on November 25, 2021 at 11:21

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Discuss documentary collection as a method of international sourcing

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