Collection is one of the options for mutual settlements between the seller and the buyer, in which the settlement is not made by the participants of the transaction themselves, but by their representative banks. In the face of the seller can act as a manufacturer and supplier of products.
Collection has many interpretations. Thus, Schmittgoff defined the operation as an organization by a financial institution to receive funds for the exporter's circulation in a place where the latter is not located. Tsvetkov and Karpukhin put into the concept such type of operations, within the framework of which the institution receives either a payment or an accent of a bill from the financial representative of the seller by transferring the securities to the buyer from his face. Collection is often viewed as a banking procedure, during which the bank collects the amount that is a buyer's debt, in return for the provision of certain documents.
Participants of collection transactions
Encashment is a format of mutual settlements in which not two parties take part, but four. Participants of the transaction are:
- The claimant. This is the person who trusts the procedure of collection to his partner bank.
- Remitting bank. This is a financial institution that is entrusted with the execution of an operation for collecting from the collector.
- Collection bank. This is a financial institution, which is entrusted with the task of implementing a collection order.
- Payer. This is a person who acts as a counterparty of the recoverer and who is responsible for making payment in accordance with the collection order.
The main advantage of settlements in the format of collection is a high level of reliability of payments. Before the payment is made, the buyer will not receive the documents in his hands. Reliability of their delivery is ensured by the fact that specialists are responsible for it. And the security of documents is guaranteed until the time of receipt of payment.
Types of collection
There are several forms of operations, which are determined by the nature of the securities used in them. It is accepted to distinguish documentary collection and clean. The pure format of the procedure is carried out only if payment documents are used in the process. It can be checks and bills, payment receipts and so on. Under the documentary format of the procedure, it is customary to understand the collection of financial papers. They must necessarily be accompanied by commercial documents. This can be invoices and bills of lading, transportation and other papers. In a transaction of this format, only commercial documents that do not require any additional support can be used. In the field of international trade, settlements for collection are, in fact, orders of exporters to their financial institutions to receive all payment under the contract from the importer. The exporter, through his financial partner, transfers to the importer all the relevant commodity documents.
Specification of calculations
Calculations in the format of this procedure have a clearly established scheme. Between the two parties, namely between the importer and exporter, is a certain contract. One of the clauses of the contract is the mention of financial institutions, through which all settlements on the transaction will be conducted. The transport company delivers the goods to the importer. After the delivery is made, the exporter receives a package of transport papers. The documents and the collection order are transferred to the partner bank. Having received a package of documentation from the recoverer, the representatives of the financial institution check everything in detail and, in the absence of errors and problems, carry out an order from the recoverer. The transfer papers are transferred to the collection bank, which already provides them to its client. If the requirements are accepted, the representative bank transfers money to the remitting bank, which then forwards the cash flow to the recoverer account.
Lack of financial settlements
Like any banking operation, both forms of collection have certain drawbacks. It is worth mentioning about the temporary gap that the importer has to face. The gap between the shipment of goods and the receipt of payment for it slows the course of the business process. The second negative point is the rather high probability that the exporter may not receive 100% payment for the goods. The reasons for this are very trivial: the lack of funds from the importer or the refusal to realize the payment or from acceptance. In connection with such high risks, there is a practice according to which exporters can demand bank guarantees. This is a kind of reinsurance from the loss of all benefits. An additional way to diversify risks is to replace the collection with letters of credit.
Difference between collection and letters of credit
Collection is the format of a financial transaction, in accordance with which the remitting bank is not liable to its customers. In accordance with the conditions for the conduct of letters of credit, the bank assumes a firm commitment in the matter of making payments to the recoverers. The letter of credit is characterized by higher reliability indicators, as the bank checks all documents personally. When settlements are made for collection, payment can be withdrawn at any time. Irrevocable letters of credit can be canceled only if each party agrees to the procedure.
When and who benefits from the collection?
Settlements in the form of collection are rational to use in those situations when a trusting relationship is formed between the importer and the exporter, in cases when both sides are 100% sure of their opponents and their solvency. Alternatively, the transaction can pass without risk, if the exporter has some papers left on his hands, in the absence of which the importer will not get the right to own the goods. If you look at the financial operation in general, then the importer gets more benefit from it. If we compare with the 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 execute the payment or to refuse it completely. Encashment is a format of financial operations that has low reliability indicators, but attracts with its material accessibility.
International collection is conducted in accordance with international rules that define the functions and liabilities of financial institutions. The Code of Standards was developed in 1936 by the International Chamber of Commerce. Since that time, they have been repeatedly supplemented and modernized taking into account changes in the world economy and the financial market. The latest edition of the standards was carried out in 1995. Almost all banks of the world always conduct collection of checks, any other documents in accordance with world standards. As an exception, there can be situations where approved standards are confronted with national or local laws or do not fit into the framework of an agreement between buyers and sellers.
In what situations is it efficient to use collection?
The oldest banking operations under the name of collection, due to a tandem of advantages and disadvantages, can be effectively used only under specific circumstances:
- In a situation, then the commodity is inherently not a commodity. It is provided to the importer in a single order format.
- In the presence of trust between the parties.
- With no restrictions on imports. An example is 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 buyer's country both in the political sector, and in the legal and economic spheres.
Terms of successful implementation of the transaction
In order for the procedure to be successful, the buyer must be not only reliable, but also be sure to have an impeccable commercial reputation. This factor should be checked on the eve of signing the contract. The provisions of the contract should be very clear in terms of the obligations of each party. Shipment of goods must be carried out in a clearly defined place and in accordance with the terms of the arrangement. Goods can be handed over to the importer only if the payment is already made, after receipt of the acceptance.