Export Finance - Advances Against Export Documentary Collections 

Documentary Collections are a long established international payment method, which usually involves the exporter, entrusting his bank (known as the remitting bank) with the handling of commercial documents (often including a bill of exchange, invoices, a transport document, an insurance certificate, a packing list etc) evidencing shipment of goods from the seller (exporter) to an overseas buyer (importer). The remitting bank will include a collection schedule with the commercial documents and this schedule will itemise all the documents included and most importantly will instruct the importer's bank (known as the collecting bank) that they are authorised to release the documents to the importer either:

  • against payment of the value of the invoice, or such other amount as specified in the collection schedule, known as D/P (documents against payment) or
  • against a written promise to pay that value on a future determinable date (this ‘promise’ is usually evidenced by the importer’s signed ‘acceptance’ on a Bill of Exchange), these collections are  known as D/A (documents against acceptance).

Collections are governed by a set of rules published by the International Chamber of Commerce, known as Uniform Rules For Collections. The current publication is URC ICC Publication No. 522.

Whilst this tried and tested means of payment facilitation has some benefits for sellers and buyers alike, it is entirely likely that there will be a tangible period of time between the delivery of the documents to the remitting bank and eventual receipt of the proceeds of the collection. This lag will include the time that it takes the remitting bank to itemise the documents against the collection schedule. As stated in URC 522 Article 12

"Banks must determine that the documents received appear to be as listed in the collection instruction and must advise by telecommunication or, if that is not possible, by other expeditious means, without delay, the party from whom the collection instruction was received of any document missing, or found to be other than listed. Banks have no further obligation in this respect"

In effect banks must just satisfy themselves that the documents are present and as stated. They will also ensure any endorsements which are required, are in order, but they are not obligated to examine the documents in great detail as they are, under a Letter of Credit.

Once the remitting bank has sent the documents and the collection schedule to the collecting bank, this other bank will need to determine that the documents have all been received as stated, and then contact the drawee (the buyer) to seek payment/acceptance in accordance with the instructions on the collection schedule. These operational banking procedures can take quite some time, and the exporter's cash flow is clearly impaired until the eventual receipt of the proceeds.   

In the 1970s and 1980s it was relatively common for banks in the UK to offer finance to selected exporting clients, against the client's export documentary collections. The finance was usually only offered against collections which were D/P, i.e. documents released against payment, and importantly the finance was provided "with recourse", with meant that the client was legally responsible for the repayment of the finance and it was shown in their balance sheets as a liability. This type of finance seemed to gradually disappear in the 1990's as a commonly offered finance facility by mainstream banks in the UK.

However there are a number of banks in the UK which are willing and able to consider providing an advance against their customer's documentary collections, but will probably want the collections to include a bill of exchange, and may call these facilities "Foreign Bills Negotiated" facilities. The inclusion of a bill of exchange provides a more defined and legally binding structure to the facility. Along with any trade finance facility, the exporter will be required to meet with a trade finance specialist from the bank, who will map out trade cycles, understand the transactions, highlighting any risks for the bank, and finally prepare a report. This report will be examined by the bank's credit function and a decision will be made to grant a facility (or to decline to grant a facility, as the case may be). The banks will be more willing to finance transactions under documentary collections rather than under open account sales as the documents pass through the bank, so there is real evidence of a transaction and there may be opportunity to control the underlying goods (will a full set of bills of lading),via the collecting bank.

The exporter ships the goods, submits the documents with the collection schedule to the remitting bank (almost certainly his own bank) and receives the advance. When the proceeds from the collection are received in from the collecting bank, the advance is repaid, and the interest for the period of the advance is paid by the exporter. There appears to be quite a variation regarding the percentage of the amount of the collection, which the banks are willing to finance. One well known mainstream UK bank will consider financing 100% of the amount of the collection, with another only willing to consider 50% of the value. Obviously, the creditworthiness of the individual client has a bearing on this percentage, but it is also evident that different banks certainly have different appetites to support this type of finance. Some mainstream banks do not offer this form of finance at all, which is quite disappointing, as it is extremely simple and beneficial to exporters.       

If the overseas buyer defaults on the payment, or there are other reasons why the proceeds are not received, the bank has recourse to the exporter. Banks will deem collections as an unsecure way for an exporter to be paid, as the exporter is in the hands of the buyer as to whether payment is made. If the worst happens and the bill of exchange is unpaid, the collection schedule will advise the collecting bank of the required action to take, which may be to obtain a legal protest for non payment, effected by a legal entity. The threat of this action, may persuade the buyer to pay the bill, but if not the bill will eventually be returned, when the seller may take legal action using the unpaid, protested bill as a means to attempt to force payment. This may prove costly and not a worthwhile venture, but in any event the bank which has provided the finance would seek repayment of the loan from the unfortunate seller.   

The bank offering the finance will have a number of considerations ; it will need to examine and be able to understand the underlying transactions and will probably prefer the exporter to have a track record and a trading history of using collections. Importantly some security will have to be made available to the financier, by the exporter to support the facility, and if the exporter has credit insurance, this would add additional weight to an application for such a facility.

In summary, financing against documentary collections can assist an exporter by providing "just post shipment" finance helping to enhance cash flow. The supporting documentary structure may provide the financier with enough additional comfort to offer a larger facility, than they would have considered without that comfort. In addition to this, the exporter should be able to negotiate a slightly improved interest rate margin on the borrowing, as the financier's risk is improved, especially if the documentary presentations include a full set of bills of lading, which will allow the constructive control of the goods, should the worst happen and the importer refuse or be unable to take up the documents.

 

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Written on 31st January 2013 by Richard Casburn Associate at MJ Hayward & Associates- www.mjhayward.co.uk

 

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