International Trade (Intl Trade) 101: Export Import Operations - Documentary Collection, DP DA Advantages Risks for Seller and Buyer

What This Is

Documentary Collection (D/P, D/A) is a payment method used in international trade where the buyer's bank guarantees payment to the seller upon presentation of compliant documents. This method provides a secure way for sellers to receive payment, but it also carries risks for both parties. For example, a Chinese exporter sells goods to a US importer under a D/P LC. The US importer's bank guarantees payment to the Chinese exporter upon presentation of the commercial invoice, bill of lading, and other required documents. However, if the US importer disputes the documents, the Chinese exporter may not receive payment.

Key Terms & Rules

• D/P (Document Against Payment): The buyer's bank guarantees payment to the seller upon presentation of compliant documents. The seller bears the risk of non-payment if the documents are not compliant.
• D/A (Document Against Acceptance): The buyer's bank guarantees payment to the seller upon acceptance of the documents. The seller bears the risk of non-payment if the buyer rejects the documents.
• UCP 600 (Uniform Customs and Practice for Documentary Credits): The international standard for documentary credits, governing the rules and procedures for LC transactions.
• LC (Letter of Credit): A payment guarantee issued by the buyer's bank to the seller, ensuring payment upon presentation of compliant documents.
• Compliant Documents: Documents that meet the requirements specified in the LC, such as the commercial invoice, bill of lading, and certificate of origin.
• Beneficiary: The seller who receives payment under the LC.
• Applicant: The buyer who opens the LC and guarantees payment to the beneficiary.
• Issuing Bank: The buyer's bank that issues the LC.
• Advising Bank: The bank that advises the seller of the LC terms and conditions.
• Confirming Bank: The bank that confirms the LC, making it irrevocable and binding on the issuing bank.

Step-by-Step Process

1. Opening the LC: The buyer's bank (issuing bank) opens the LC in favor of the seller, specifying the terms and conditions, including the documents required for payment.
2. Issuing the LC: The issuing bank issues the LC to the advising bank, which advises the seller of the LC terms and conditions.
3. Presentation of Documents: The seller presents the compliant documents to the advising bank, which forwards them to the issuing bank.
4. Verification of Documents: The issuing bank verifies the documents to ensure they meet the requirements specified in the LC.
5. Payment to Beneficiary: If the documents are compliant, the issuing bank pays the beneficiary (seller) under the LC.
6. Reimbursement by Applicant: The applicant (buyer) reimburses the issuing bank for the payment made to the beneficiary.

Common Mistakes

• Mistake: Confusing D/P and D/A LCs.
• Correction: D/P LCs require payment upon presentation of compliant documents, while D/A LCs require acceptance of the documents before payment is made.
• Example: A Chinese exporter sells goods to a US importer under a D/P LC. The US importer's bank guarantees payment to the Chinese exporter upon presentation of the commercial invoice and bill of lading. If the US importer disputes the documents, the Chinese exporter may not receive payment.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account transactions do not involve a LC, and the buyer may dispute the invoice or refuse payment.
• Example: A US importer purchases goods from a Chinese exporter under an open account transaction. The US importer disputes the invoice, and the Chinese exporter may not receive payment.
• Mistake: Misusing "free on board" (FOB) with air freight.
• Correction: FOB applies to sea and inland waterway transport, not air freight. For air freight, use "free at airport" (FAA) or "free on airport" (FOA).
• Example: A Chinese exporter sells goods to a US importer under FOB Shanghai. The US importer assumes the Chinese exporter has delivered the goods to the airport, but the Chinese exporter has only delivered the goods to the port gate.

Exam / Certification Tips

• FOB vs FCA: FOB applies to sea and inland waterway transport, while FCA applies to all modes of transport.
• Confirmed vs Unconfirmed LC: A confirmed LC is irrevocable and binding on the issuing bank, while an unconfirmed LC is revocable and not binding.
• DPU Successor to DAT: DPU (Delivered at Terminal) is the successor to DAT (Delivered at Terminal), which is no longer used.
• Key Distinctions: Be able to distinguish between D/P and D/A LCs, FOB and FCA, and confirmed and unconfirmed LCs.

Quick Practice Scenario

A Chinese exporter sells goods to a US importer under a D/P LC. The US importer's bank guarantees payment to the Chinese exporter upon presentation of the commercial invoice and bill of lading. However, the US importer disputes the documents, and the Chinese exporter may not receive payment. Answer: The Chinese exporter may not receive payment because the US importer disputes the documents. Explanation: The D/P LC requires payment upon presentation of compliant documents, and the US importer's dispute of the documents may prevent payment.

Last-Minute Cram Sheet

• D/P (Document Against Payment): The buyer's bank guarantees payment to the seller upon presentation of compliant documents.
• D/A (Document Against Acceptance): The buyer's bank guarantees payment to the seller upon acceptance of the documents.
• UCP 600 (Uniform Customs and Practice for Documentary Credits): The international standard for documentary credits.
• LC (Letter of Credit): A payment guarantee issued by the buyer's bank to the seller.
• Compliant Documents: Documents that meet the requirements specified in the LC.
• Beneficiary: The seller who receives payment under the LC.
• Applicant: The buyer who opens the LC and guarantees payment to the beneficiary.
• Issuing Bank: The buyer's bank that issues the LC.
• Advising Bank: The bank that advises the seller of the LC terms and conditions.
• Confirming Bank: The bank that confirms the LC, making it irrevocable and binding on the issuing bank.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• D/P LCs require payment upon presentation of compliant documents, while D/A LCs require acceptance of the documents before payment is made.
• FOB applies to sea and inland waterway transport, not air freight.
• A confirmed LC is irrevocable and binding on the issuing bank, while an unconfirmed LC is revocable and not binding.