Future Internet PPP Use Case Project

Future Internet PPP

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Draft or Documentary Collection

The Draft or Documentary Collection method is employed when either the cash in advance method is not acceptable to the buyer, or the open account method is not acceptable to the seller. With the Draft or Documentary Collection method, the seller or exporter ships the goods and draws a draft or bill of exchange on the buyer or importer through an intermediary bank. The draft is an unconditional order to make a payment in accordance with certain terms. The documents needed are specified before the title for the goods is transferred.

There are four parties involved in the documentary collection method:
1. The buyer,
2. collecting/presenting bank (buyer’s bank),
3. the seller, and
4. the remitting bank (seller’s bank).

There are also four main steps in the documentary collection method.
1. The seller sends the draft to the remitting bank;
2. The remitting bank, as an intermediary, sends the draft to the collecting/presenting bank;
3. The collection/presenting bank, as an intermediary, makes the documents available to the buyer;
4. The buyer, after examine the documents, has three options:
- to pay immediately
- to pay at a future date
- to refuse to pay for the draft

When the draft is paid, the title documents are released to the buyer so they can obtain possession of the goods. As the title to the goods is not transferred until the draft is paid or accepted, both the buyer and seller are protected. However, nothing prevents the buyer from refusing a draft for payment.
In such cases, the exporter, who has already shipped the goods, faces the problem of getting its merchandise back, which may involve warehousing or insuring the goods, or even disposing of the merchandise at the collection point. If the buyer refuses or defaults on payment of the draft, the seller may also have to pursue collection through the courts (or possibly, by arbitration, if such had been agreed upon between the parties). The use of drafts involves a certain level of risk; but they are less expensive for the purchaser than letters of credit.


Sight Drafts

If the exporter and importer have agreed that payment should be made immediately upon receipt of the draft and/or shipping documents by the buyer's bank, the draft is said to be drawn at sight. A sight draft is an order signed by the seller instructing the buyer to pay a specified amount to the seller upon presentation of the draft.

Time Drafts

If the seller has provided credit terms to the buyer, thereby allowing the merchandise to be released before payment is received; it is called a time draft. The exporter will need a written promise from the buyer that payment will be made at a specified future date. When a bank receives time drafts, the bank is requested to deliver the documents only when the buyer has accepted. The buyer's acceptance of the draft is his/her agreement to pay at an agreed upon future date.

See Trade Payment Methods

Last change: 2011-11-15

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