Pre Shipment Finance Using Export Documentary Collections - it is possible!

 

It is relatively common for UK exporters, especially those who are selling scrap metals to buyers in Asia, to use Documentary Collections as a method of payment.  Collections are governed by a set of rules published by the International Chamber of Commerce, known as Uniform Rules For Collection. The current publication is URC ICC Publication No. 522.

There are two preferred types of Documentary Collection;   

Documents against Payment  (D/P)  -often called  ‘Cash Against Documents’ by exporters

  • Documents are released to the importer in exchange for payment of the value of the invoice, or such other amount as specified in the collection schedule, or

Documents Against Acceptance (D/A)

  • Documents are released against the importer’s written promise to pay that value on a future date. This ‘promise’ is usually evidenced by the importer’s signed ‘acceptance’ on a term Bill of Exchange. Payment will be made at a fixed or determinable future date.

This tried and tested method of payment does not provide the exporter with any certainty that payment will be received from the buyer, but if the exporter has included a full set of bills of lading together with the other shipping documents and the collection is D/P, i.e a cash against documents item, then the collecting bank must not release the documents to the importer, until payment has been received. This effectively allows the exporter to retain constructive control over the goods, should the worst happen and the buyer refuses to pay for the documents.   

Risk considerations for exporters when using Documentary  Collections (D/P)

  • Increased confidence. A more structured method of payment than Open Account trading.
  • Control of the goods - As stated above - Documents relating to the exported goods are only released by the collecting/presenting bank upon payment by the importer. If the buyer does refuse to pay for the documents this may mean that the exporter has to find alternative buyers, and  if necessary the goods may have to be shipped back to UK. This would be a worst case scenario and in the case of scrap metal, it is highly likely that an alternative buyer could be found in the territory.
  • Credit Risk. Documentary Collections do not remove credit risk, a particular issue when using D/A documents against acceptance collections, as the buyer may refuse/be unable to pay at the maturity/due date.   
  • Enhanced credit control. The ability of the remitting (exporter's) bank to chase payment seeking reasons why the proceeds have not been received/documents taken up by the  buyer (known as the drawee).
  • Not as secure as Letters of Credit. It should be noted that from a risk perspective, Letters of Credit provide a greater degree of certainty of payment to the seller than Documentary Collections. Letters of Credit represent a conditional guarantee from the buyer's bank made to the beneficiary, that if documents which comply to the terms of the Letter of Credit are presented, the Issuing bank must honour (pay) the beneficiary. There are no such guarantees when using Documentary Collections.

It should be noted that Documentary Collections are currently welcomed by buyers in Asia with a general tightening of credit in the region. This method of payment will have no impact on the facilities that the buyer has with their bankers/financiers, since the bank in  Asia which handles the collection, does not guarantee to pay, so no facility is required.

Advances Against D/P Export Documentary Collections -  a "with recourse facility".

Most mainstream UK bank used to routinely offer export finance facilities, by way of a loan,  with funds being advanced soon after documents were presented by the exporter using documentary collections. The loan was repaid when the proceeds of the collection were received in from the overseas collecting or presenting bank. Indeed there used to be ECGD - government backed schemes for smaller exporters, where short term finance was provided, and the payment method for settlement between seller and buyer was a documentary collection. 

Although still an option this type of advancing against an export collection has not been proactively offered by most mainstream banks for many years, and quite inexplicably it is a financing solution which seems to have fallen into disuse.

However, there are a number of popular mainstream banks willing to offer finance, providing advances to clients, once the bank has processed the documentary collection, sending the documents to the overseas bank for presentation to the buyer. Very recently, two well known banks have independently submitted proposals to an exporting company, which not only offered "post shipment" advances against export documentary collections, but also offered to finance these export sales for a defined pre-shipment period, provided that the exporter was able to evidence that they had a confirmed orders for the goods from a selection of buyers, pre-approved by the financing bank. The offers varied in the percentage of the value of the documents which the banks were willing to finance, but the highest offer was to finance 75% of the value of the sale pre-shipment, with 100% of the value, once the shipping documents had been evidenced and remitted using the documentary collection.    

It must be stressed that the exporter in question has a very strong track record of getting paid under their documentary collections, they also have a strong financial performance and are able to provide a financier with tangible security, so this type of arrangement will only ever be considered on a case by case basis, but it does show that banks can be flexible and show some imagination in terms of structuring facilities. It will be of great benefit to the exporter's cash flow, it will  also enable the exporter  to significantly grow their business in Asia.  

 

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Written 28th February 2013 by Richard Casburn at MJ Hayward Associates Ltd - www.mjhayward.co.uk

 

Relevant Training Courses

Letters of Credit Workshop for Exporters

Advance Guide to Letters of Credit & Finance

Risk Management and Finance for Importers

 

 
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