Exports

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Querist : Anonymous (Querist)

24 August 2013 For doing exports which option is better and safe?
DA
DP
or LC.

RAMESH KUMAR VERMA

RAMESH KUMAR VERMA (Expert)
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24 August 2013 Payment Collection Against Bills also known documentary collection as is a payment method used in international trade all over the world by the exporter for the handling of documents to the buyer's bank and also gives the banks necessary instructions indicating when and on what conditions these documents can be released to the importer.

Collection Against Bills is published by International Chambers of Commerce (ICC), Paris, France. The last updated issue of its rule was published on January 1, 1966 and is know as the URC 522.

It is different from the letters of credit, in the sense that the bank only acts as a medium for the transfer of documents but does not make any payment guarantee. However, collection of documents are subjected to the Uniform Rules for Collections published by the International Chamber of Commerce (ICC).

Docuemts Against Aceptance (D/A)

Under Documents Against Acceptance, the Exporter allows credit to Importer, the period of credit is referred to as Usance, The importer/ drawee is required to accept the bill to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods.

The payment date is calculated from the term of the bill, which is usually a multiple of 30 days and start either from sight or form the date of shipment, whichever is stated on the bill of exchange. The attached instruction would show "Release Documents Against Acceptance".
Risk

Under D/A terms the importer can inspect the documents and , if he is satisfied, accept the bill for payment o the due date, take the documents and clear the goods; the exporter loses control of them.
The exporter runs various risk. The importer might refuse to pay on the due date because :

He finds that the goods are not what he ordered.
He has not been able to sell the goods.
He is prepared to cheat the exporter (In cases the exporter can protest the bill and take the importer to court but this can be expensive).
The importer might have gone bankrupt, in which case the exporter will probably never get his money.

Documents Against Payments (D/P)

This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P means payable at sight (on demand). The collecting bank hands over the shipping documents including the document of title (bill of lading) only when the importer has paid the bill. The drawee is usually expected to pay within 3 working days of presentation. The attached instructions to the shipping documents would show "Release Documents Against Payment"
Risks :

Under D/P terms the exporter keeps control of the goods (through the banks) until the importer pays. If the importer refuses to pay, the exporter can:

Protest the bill and take him to court (may be expensive and difficult to control from another country).
Find another buyer or arrange a sale by an auction.

With the last two choices, the price obtained may be lower but probably still better than shipping the goods back, sometimes, the exporter will have a contact or agent in the importer's country that can help with any arrangements. In such a situation, an agent is often referred to as a CaseofNeed, means someone who can be contacted in case of need by the collecting bank.

If the importers refuses to pay, the collecting bank can act on the exporter's instructions shown in the Remitting Bank schedule. These instructions may include:

Removal of the goods from the port to a warehouse and insure them.
Contact the case of need who may negotiate with the importer.
Protesting the bill through the bank's lawyer.

Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as:

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :

Is to make a payment to or to the order third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.
Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).
Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.