In cross-border trade, a documentary collection (D/Cs) is to be seen more as a payment condition than a form of collateral. From neither the exporter’s nor the importer’s perspective does this method afford the security comparable with that of a documentary LC. This applies to both guarantee of payment and assurance of quality and quantity of the goods. The costs of a transaction are therefore significantly less than those of a corresponding documentary LC. Under German law, this is referred to as a “Zug-um-Zug” deal, a synallagmatic or reciprocal and simultaneous transaction.
There are 2 types of collections: “documents against payment” (D/P) or “documents against acceptance” (D/A). The documents are given to the importer either against immediate payment or against acceptance of a bill of exchange/promise of payment. With a promise to pay, the exporter has no certainty that on the due date the importer will have sufficient funds to pay. Unlike an LC, a D/C does not come with a separate commitment to pay from either the importer’s bank or the exporter’s bank.
The process of a collection usually begins with the conclusion of a purchase contract between importer and exporter. After shipment of the goods, the exporter presents the shipping documents as collection documents to its bank and issues an appropriate collection order. The exporter’s bank then sends the documents with a corresponding collection order to the importer’s bank abroad. The importer’s bank checks the documents for completeness and formal compliance with the collection order. It then informs the importer of the collection order and the documents. As a rule, the importer instructs its bank to take up the documents and make payment or the importer accepts a bill of exchange or irrevocably undertakes to pay at maturity.
If the importer does not take up the documents, then depending on the exporter’s instructions, the goods are either sent back or warehoused and kept available for another buyer.
Since January 2016, pursuant to a central bank circular, Egyptian banks are instructed to accept only documents (export invoices, bills of lading) that are sent directly from the exporter’s bank to the Egyptian importer’s bank. Only then does the importer obtain the so-called “Form No. 4”. Without this form, the importer may not collect the goods from customs. This means that the documents must be forwarded as part of either a documentary collection or a letter of credit!