Collections

Financial instruments that are payable against the physical presentation of a demand for payment often require a bank to act as intermediary in the collection process. When the item to be collected must be presented in a foreign country, it is especially important to be able to rely on a bank’s international collection service.

An international collection is basically the same as a domestic collection. A bank, acting as an agent of the drawer of a draft, the payee of a check, or the holder of a promissory note or other negotiable instrument, presents the item to the maker/drawee for payment. When the parties (the payer and payee) are some distance apart, banks working together as agents will act as collector and remitter. The collection process is of particular importance to international business because it the only way of clearing paper, and the bank-to-bank network of presentation provides an effective method of collecting foreign receivables.

Clean Collections
While every check presented for payment is essentially collected, there are several major differences between the collection of clean foreign items and those routinely run through the vast clearing system in the United States. Here, checks that are deposited are cleared through the Federal Reserve, local and regional clearing houses, by electronic imaging or simply presented in batches for payment across the counters of banks everywhere.

The signature of the party on whose account the check is drawn is evidence of authority to pay. Except in the case of fraud, items that go unpaid because of deficiencies such as being drawn on insufficient funds or blocked by a stop-payment order, are quickly noted and returned to the prior holder.

Non-check items such as payable-through and demand drafts must be presented to the drawee for payment, but this process too is relatively brief. The costs for clearing these items are low and pricing is competitive, so that paper-clearing processes remain a cost effective way of moving funds within this country.

The situation changes significantly when checks drawn on foreign points are presented for collection. Anyone who receives funds in the form of a foreign check or draft should be prepared for a longer clearing time and additional clearing costs. The depositor should understand that the stringent guidelines imposed on check clearings in the United States do not apply outside of this country. Items can be returned weeks or even months after they have been deposited.

There are a few things to consider when accepting payment by checks drawn on foreign points:

• There is no international clearing system. To receive final payment, every check must be sent individually or in batches to the bank on which it is drawn.
• There are no international rules for clearing items. Negotiable instruments are cleared in accordance with the commercial laws in effect in the country in which the item is drawn. Returned checks can appear weeks or even months after the date of deposit. Though these delays can be protested, one should hold out little hope for compensation.
• To assure payment in available funds are not subject to return, the payee should ask that the item be collected. In this case, no ledger credit is given until funds are received by the collecting bank. The cost of this procedure is considerably greater than the normal foreign item clearing charge of $3 per item. The minimum clean collection fee is $25.
• Collection time varies. Some items require only a few days, while others can take weeks. Collection is a labor-intensive process that requires physical handling at every clearing point. Other, non-check items such as drafts, trade acceptances, and promissory notes are always sent for collection. The normal minimum collection period for items that are not refused by the drawee is about two weeks.

Documentary Collections
As a means of collecting foreign receivables, directing inward remittances and, in some cases, mitigating the risk of selling on open account, the documentary collection is a simple, cost-effective tool. The documentary collection is a draft or demand for payment with commercial documents, usually an invoice and a bill of lading, attached to a collection letter.

This process can protect the seller against commercial loss by maintaining control of the merchandise until payment is received. In the case of extended terms whereby a time draft would be presented for acceptance by the buyer, the collection process streamlines the procedure and creates a useful paper trail.

It is important to remember, however, that banks act as agents for their customers and their correspondents, and have no obligation to the parties other than the faithful execution of the collection letter’s instructions. The No. 522: Uniform Rules for Collections, of the International Chamber of Commerce, Publication No. 322, outlines the responsibilities of the parties in the collection process.

Advantages and Disadvantages
A documentary collection offers more protection to an exporter than he would have when selling on open account, for if title documents are part of the collection packet, access to the merchandise can be controlled. Moreover, payment is always effected in readily available funds so the exporter is not faced with accepting a check, which would itself have to be collected.

The importer is also protected by the documentary collection process in the knowledge that merchandise has been shipped, as evidenced by the shipping documents. It is a far better arrangement than payment by cash in advance. For both exporter and importer, the documentary collection is cost-effective as collection fees are typically modest.

The disadvantage of selling on a documentary collection basis is that while the merchandise may be protected, it is still in a foreign port. If the drawee fails to pay, an alternate buyer must be found or the goods must be returned at the expense of the seller. 

Flow of Goods and Documents
Understanding the flow of goods and documents is essential for proper planning and scheduling of shipments. It is important to remember that banks only deal in documents while the merchandise flows directly from seller to buyer. Banks can be instrumental in controlling access to merchandise, but generally are unprepared to assume any other role in this commercial process. The following steps outline the flow of goods and documents:

1. The seller ships the merchandise in accordance with the underlying sales contract (purchase order or more formal agreement) and assembles shipping documents and draft (see figure 1 above).
2. The seller then presents these commercial documents to INTRUST, along with an instruction letter asking the bank to send them out for collection (see figure 2 above). INTRUST provides printed drafts with attached collection letters without charge, an Excel file for document preperation or access to electronic processing and monitoring. (see figure 7 below).
3. INTRUST, as the remitting bank, sends the packet along with a collection letter to the collecting bank which will make presentation to the drawee/buyer (see figure 3 below).

4. a.
   If the draft is drawn at sight, the collecting bank will release the documents to the buyer, only after payment is made (see figure 4, below). This process is also known as document against payment, or D/P. If the drawee refuses payment, the documents will be held pending further instructions. Otherwise, payment will be collected and forwarded to INTRUST for credit to the seller’s account.

4. b.
   If the draft is drawn at “X days sight” or “X days after shipment,” the drawee will be asked to accept the draft by signing a legend superimposed on the face of the draft acknowledging payment due on a certain date. This process is also known as documents against acceptance. Documents will then be released to the drawee and the draft will be represented for payment at its maturity. Again, if the drawee refuses payment, the accepted draft will be held pending further instruction. Under normal circumstances, the draft will be paid at maturity and the proceeds will be transferred to INTRUST for credit to the seller’s account.
5. The buyer then presents the bill of lading and other required shipping documents to the party holding the merchandise (e.g., the freight forwarder, a port of entry holding facility, etc.). The documents are reviewed, and if they are found to be in order, the merchandise is released to the buyer (see figure 5 below).

Direct Send Collections
INTRUST offers a service known as direct send collection which allows the exporter to streamline the collection of receivables by assuming the initial function of the remitting bank. The seller or agent for the seller, such as a freight forwarder, prepares the collection letter and sends it along with the commercial document directly to the buyer's bank for collection. The following steps outline the direct send collection process:

1. The exporter ships the merchandise in accordance with the underlying sales contract, then prepares and assembles the shipping documents.
2. INTRUST’s Direct Collection Form is completed, attached to the documents and sent directly to the foreign collecting bank. If using preprinted forms, the remaining copies are distributed in accordance with the instructions printed in the upper left corner of the form. If using an automated system, a copy is remitted electronically to INTRUST.
3. When INTRUST’s copy of the collection letter is received, the pertinent information is recorded, and from that point on, the collection process continues as noted under Flow of Goods and Documents above. The greatest advantage of this process is time savings. Two or three days can be trimmed from the collection cycle. The fee for direct send collection is also lower than regular collections, for the exporter prepares the cover letter and pays the postage. The cost in either case is nominal.