Forms of Short-term Financing/Documentary Collections

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Globe for WikiEducator.jpg Unit 7.1-Forms of Short-term Financing 

Introduction | Preparing to Borrow | Vendor Financing | Documentary Collections | Bank Check | Personal Resources | Bank Financing | Export Credit Insurance | Guarantees | Ex-Im Bank Financing | SBA | Equity Investment | Earnings Requirments | Working Capital | Collateral | Resource Management | Primary Differences | Factoring | Forfaiting | Summary | Resources | Activities | Assessment

Documentary Collections

Documentary collections allow a buyer to import goods at the risk of the seller. Buyers often pay for the documents when the arrival notice is received. The buyer having paid for the documents, the bank will release the negotiable documents to this buyer, thus allowing for the release of the goods by the carrier. Documentary collections can also be presented with an extended payment bank draft. This form of financing assigns greater risk to the seller because once the buyer accepts responsibility to pay at maturity by signing the bankdraft, the documents are released to the buyer. The title to the goods passes to the buyer, and the only recourse to the seller if the buyer does not pay at maturity is to seek legal recourse. Doing so is costly and time-consuming for the seller. The buyer could provide the seller with a guarantee of payment from his bank by transferring the responsibility for the payment from the buyer to his bank. This action occurs if the buyer’s bank, relying on the credit facility they have with the buyer, avalizes the draft, thereby assuming responsibility for the payment at maturity. It is important for the seller to analyze a buyer carefully before extending credit terms under a documentary collection.