Collection is one of the options for the implementation of settlements between the seller and the buyer, in which the calculation is made not by the parties to the transaction, but by their representative banks. In the face of the seller may be the manufacturer and supplier of products.
The collection has many interpretations. So, Schmittgoff defined the operation as an organization by a financial institution receiving funds at the request of the exporter in a place where the latter is not located. Tsvetkov and Karpukhin put into the concept this type of operation, in which the institute receives either payment or an emphasis on a bill from the financial representative of the seller by transferring securities on his behalf to the buyer. A collection is often viewed as a banking procedure, during which the bank collects the amount that is the buyer's debt, in exchange for the provision of certain documents.
Collection transaction participants
Collection is a format of settlements in which not four parties take part, but four. The participants in the transaction are:
- Claimant. This is a person who trusts the procedure of collection to his partner bank.
- Remitting Bank. This is a financial institution, which is entrusted with the execution of the collection operation by the collector.
- Collecting Bank. This is a financial institution entrusted with the task of implementing a collection order.
- Payer. This is a person who acts as a counterparty to the recoverer and who is charged with the obligation to make payment in accordance with the collection instruction.
The main advantage of settlements in the collection format is a high level of reliability of payments. Until such time as the payment will be made, the buyer will not receive documents in his hands. Reliability of their delivery is ensured by the fact that they are responsible for specialists. And the safety of documents is guaranteed until the receipt of payment.
Types of collection
There are several forms of operations, which are determined by the nature of the papers used in them. It is customary to distinguish between a documentary collection and a clean one. The net format of the procedure is carried out only if the process uses payment documents. These can be checks and bills, payment receipts and so on. The documentary format of the procedure is usually understood as a collection of financial papers. They must be accompanied by commercial documents. These can be invoices and invoices, transport and other papers. In the transaction of this format can only be used commercial documents that do not require any additional support. In the field of international trade, collection payments are, in fact, the instructions of exporters to their financial institutions to receive the full payment under the contract from the importer. The exporter, through its financial partner, transmits to the importer all relevant commodity documents.
Calculations in the format of this procedure have a clearly defined scheme. A contract is concluded between the two parties, namely between the importer and the exporter. One of the clauses of the contract is the mention of financial institutions through which all transactions will be settled. The transport company delivers the purchased goods to the importer. After delivery, the exporter receives a package of transport papers. Documents and collection instructions are transferred to the partner bank. Having received a package of documentation from the claimant, representatives of the financial institution check everything in detail and, in the absence of errors and problems, carry out an order from the claimant. Papers on transfer are transferred to the collecting bank, which already provides them to its client. If the requirements are accepted, the representing bank will transfer the money to the remitting bank, which will then redirect the cash flow to the collector’s account.
Disadvantages of financial settlements
As with any banking business, both forms of collection have certain disadvantages. It should be said about the time gap that the importer has to face. The gap between the shipment of goods and the receipt of a calculation for it slows down the business process. The second negative point is a rather high probability that the exporter may not receive 100% payment for the goods. The reasons for this are quite trivial: the lack of funds from the importer or the refusal to make a payment or acceptance. In connection with such high risks, there is a practice according to which exporters may require bank guarantees. This is a kind of reinsurance from the loss of all benefits. An additional way to diversify risks is the replacement of a collection of letters of credit.
Difference of collection and letters of credit
A collection is a financial transaction format in accordance with which the remitting bank is not liable to its customers. In accordance with the terms of the letter of credit, the bank undertakes a firm obligation in the aspect of making payments to claimants. A letter of credit is characterized by higher reliability rates, as the bank checks all documents personally. When payments are made for collection, the payment can be withdrawn at any time. An irrevocable letter of credit can only be canceled if each of the parties has given its consent to the procedure.
When and who benefits from the collection?
Calculations in the form of collection are rational to use in situations where trust between the importer and the exporter is formed in cases where both parties are 100% sure of their opponents and their solvency. Alternatively, the transaction can be completed without risk if the exporter has certain securities on his hands, in the absence of which the importer does not acquire the right to own the goods. If you look at the financial transaction in general, then it is the importer that receives the most benefit from its performance. If we compare it with a letter of credit, then in this situation it is not required to provide additional guarantees to the financial institution. The importer always reserves the full right to make the payment or to refuse it completely. Collection is a format of financial transactions, which is characterized by low reliability indicators, but attracts with its material accessibility.
International collection is carried out in accordance with international rules that define the functions and obligations of financial institutions. The code of standards was developed in 1936 by the International Chamber of Commerce. Since then, they have been repeatedly supplemented and modernized to reflect changes in the global economy and in the financial market. The latest edition of the standards was carried out in 1995. Almost all banks in the world always hold a collection of checks, any other documents in accordance with international standards. As an exception, there may be situations when the approved standards come into confrontation with national or local laws or do not fit into the framework of an agreement between buyers and sellers.
In what situations effectively use the collection?
The oldest banking operations called collection, due to the tandem of advantages and disadvantages, can be effectively used only under specific circumstances:
- In a situation, then the product is in its essence and does not act as a product. It is provided to the importer in the format of a single order.
- In the presence of trust between the parties.
- With no restrictions on imports. As an example, the presence of currency controls in the country where the buyer is located.
- If there are certain difficulties in the process of obtaining licenses.
- Stable situation in the country of the buyer in the political sector, and in the legal and economic.
Terms of successful transaction
In order for the procedure to be successful, the buyer must not only be reliable, but must also have an impeccable commercial reputation. This factor must be checked on the eve of the signing of the contract. The provisions of the contract should be very clear in terms of the obligations of each of the parties. Shipment of goods must be carried out in a clearly defined place and in accordance with the terms of the agreement. It is permissible to transfer trade documents to the importer only if payment has already been made, after receiving acceptance.