The Parties to a Collection

The parties to a collection are as follows.

1. The principal. This is a customer who entrusts the operation of collection to his bank. For our purposes, this might be

(a) an exporter in the UK entrusting the collection to his UK bank; or

(b) a foreign supplier of goods to a UK company entrusting the collection to a bank in his own country.

2. The remitting bank. This is a bank to which the principal has entrusted the operation of collection. For example, if a UK exporter entrusts a collection to his UK bank, this bank will be the remitting bank in the collection.

3. The collecting bank. This is any other bank, apart the remitting bank, involved in processing the collection orders. In our example of the UK exporter, this will be an overseas bank to which the UK remitting bank sends a collection order.

4. The presenting bank. This is a collecting bank which makes the presentation to the drawee. (The drawee is defined as “the one to whom presentation is to be made according to the collection order.)

Exporter

Remitting bank

Collecting bank

May be the same bank

Presenting/collecting bank

Buyer

For a clean collection, the commercial documents are sent direct by the exporter to the overseas buyer. The remitting bank which, in turn, will use the services of the collecting/presenting bank) will be asked to arrange for:

(a) payment of a bill of exchange on sight, or payment of a promissory note or cheque; or

(b) acceptance of a term bill of exchange. The bank will then be instructed to arrange for the payment to be obtained when the bill matures.

Clean collection

The only advantage of a clean collection involving a bill of exchange rather than a cheque is that the presentation of the bill to the buyer by a bank might prompt the buyer into paying. The exporter might have difficulty in prompting the buyer to pay if he relies on the buyer to initiate payment by sending a cheque or promissory note. At least with the bill of exchange, the bill is drawn by the exporter who therefore initiates payment himself and enlists the aid of his bank in obtaining acceptance/payment.

Documentary collections: d/p and d/a

For a documentary collection, the bank may be instructed to release the commercial documents to the buyer only against payment for the goods. This form of collection is referred to as D/P or documents against payment.

When a bill of exchange is the financial document, it will be either (a) a sight bill or (b) a term bill (usance bill) which has previously been accepted and has now reached its maturity date for payment. (In trade with buyers in the Far East, in particular, documents of title may not be handed over until payment of a term bill.)

Alternatively with a documentary collection, the bank may be instructed to release the commercial documents to the buyer only against immediate acceptance by the buyer of a bill of exchange, drawn on him by the exporter. This form of payment is referred to as D/A or documents against acceptance. The bill of exchange will be a term bill (also known as a tenor bill or usance bill).

A bill of exchange which is accompanied by commercial documents of title to the goods is known as a documentary bill.