Documentary collection (inkasso)

In foreign trade, a collection (inkasso) usually means a documentary collection. After shipment, the seller hands the shipping documents to its bank together with a collection order. That bank forwards them to the buyer’s bank. The buyer collects the documents only after paying or accepting a bill of exchange. Without the documents, above all the bill of lading, the buyer will not get the cargo. International transactions are usually handled under the rules of the International Chamber of Commerce, URC 522.

Who is involved

• Principal: the seller who instructs the bank to handle the collection.
• Remitting bank: the seller’s bank.
• Collecting bank: a bank in the buyer’s country, which often also presents the documents.
• Drawee: the buyer.

Types

• Documents against payment (D/P): the buyer pays and immediately receives the documents.
• Documents against acceptance (D/A): the buyer accepts a bill of exchange and receives the documents, and pays later, when the bill falls due.
• Clean collection: the bank passes on only a financial document, such as a bill of exchange or a check, without shipping documents.

How it differs from a letter of credit

With a letter of credit, the bank itself undertakes to pay. With a collection, the banks only pass on documents and money and are not liable for payment. If the buyer refuses to pay, the seller is left with cargo in a foreign port. On the other hand, a collection costs less and is simpler to arrange.

When it fits

A collection suits reliable partners with whom there is already a track record. With new counterparties, the seller’s risk is high, especially under D/A. Besides, the arrangement works only if the parties’ banks deal with each other. If there is no such link, the payment under the contract is made in other ways, for example through an agent: Foreign trade contract payments.

The Russian word inkasso has another meaning too: a collection order in domestic settlements. Under it, a claimant, such as the tax authority, debits money from the debtor’s account without the debtor’s instruction.