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Collection (CAD)
Important
Collection (CAD – Cash Against Documents) is another instrument, besides the letter of credit, widely used in foreign trade. In this case the documents submitted by the seller are released by the bank to the buyer against the buyer's payment or payment obligation.
Types of collection
- “Clean” collection, where only financial documents (drafts, cheques, payment receipts, etc.) are submitted for collection
- Documentary collection, where the purchase and shipping documents (transport and customs documents, documents of origin, insurance and quality documents, and the like) are presented to the bank alone or together with financial documents
How does documentary collection work?
- The initiating party of documentary collections is the seller who submits the collection order and the required consignment documents to its bank, called the remitting bank.
- The bank sends the documents according to the seller's instructions to the buyer's bank, i.e. the collecting bank.
- The collecting bank contacts the buyer and notifies that the collection order and documents have been received.
- The buyer is entitled to check these documents before effecting the payment. When the documents are accepted, the buyer will give the bank the authorisation for disbursement and becomes the owner of the documents.
When the documents are sent to the buyer for collection, the seller retains control over them until the buyer has paid the collection amount. When, however, documents are sent for acceptance, the bank in the buyer's country will release these documents to the buyer against an unconditional payment undertaking. Actual effecting of payment on the required future date depends only on the solvency and reliability of the buyer. Thus, if a seller uses collection as a means of payment, it is assumed that the company has confidence in the buyer and its solvency.
The buyer can always refuse to redeem the documents (usually the goods have already been shipped to the buyer). On such occasions, the seller must give the remitting bank explicit instructions regarding further course of action.
In all matters related to collection orders, the banks may base their actions only on the instructions of the party submitting the collection order. According to the instructions, received from the seller/the remitting bank, the collecting bank may employ measures for retension or storage of the above mentioned goods. All expenses related to those procedures are to be borne by the seller.
In case of collection, banks are only responsible for the financial aspect of the transaction, having no relation to the physical goods specified in the sales contract. Banks are not responsible for the storage, transportation, or origin of the goods, nor for the accuracy, lawfulness or genuineness of the documents submitted to them.