A Form Of Non-Cash Settlements - What Is Collection And How Does It Work?

Collection is one of the tools that an entrepreneur can use in settlements with his contractors. This form involves the bank acting as an intermediary in the area of financial matters.

Definition

Collection is a form of non-cash settlements. It involves the supplier placing an order with his bank to collect the receivables from the recipient. The collection is used by companies that trust their business partners, and when there are no fears that the buyer will refuse to collect the goods or pay for them. It is the use of non-cash money as a means of payment.

Until now, it is known that in order to settle financially using a collection, cash is not needed. The main role here is played by the collecting bank, which collects receivables from the recipient at the customer's request. The Bank is a completely neutral party, it is only an intermediary between contractors and does not control the contract between them in any way. The bank is also not responsible for the success of the transaction. Nor does it recognize the collection as a source of obligation towards itself.

In order for a bank customer to use a collection loan, he must meet several conditions, as in the case of an attempt to obtain a traditional loan. The element taken into account in such a situation is primarily the creditworthiness of the entrepreneur. The price of the goods for which the bank will charge the contractor is also important.

The means of payment are both financial and commercial documents. The first type of items includes bills of exchange, checks, depositary receipts, banknotes, as well as stocks and bonds. On the other hand, commercial documents are defined as invoices, certificates of goods, transport documentation, documents confirming the title of ownership or insurance documents.

Types of collection

Due to various factors that are important in specific transactions in which credit collection is used, many variants of this form of payment have been distinguished.

Taking into account the subject of the collection, the following are distinguished:

• Documentary collection - most often used in settlements between enterprises conducting business activity, the bank collects the amount due from the counterparty if it receives the relevant documents that are the subject of the collection;
• Financial collection - the opposite of documentary collection, in this case only financial documents are the subject of the collection.

Due to the time of collecting the receivables by the bank, the following are defined:

• Cash collection - consists in making repayments within 3 days of the bank's notification of the arrival of the collection documents from the other party's bank; the fee must be paid in order to be able to receive the goods.
• Acceptance collection - consists in making a payment within the time limit set by the payer, which is why this type of collection is referred to as timely.
• Immediate collection - involves the immediate settlement of the amount due by the payer.
• Automatic collection - is used in situations where partners trust each other and the transaction is of high value, then the banks authorize each other to charge each other, automatic payments are made.
• Guaranteed collection - they are used in the event of lack of confidence in the counterparty; the principal then expects a guarantee from the bank of his business partner in the event of failure to pay the fee within the agreed period.

There are also other types of collection:

• Commodity collection - consists in the fact that the bank may release the goods to a third party if the payer fulfills the agreed obligation.
• Car collection - consists in providing the bank with income from the whole day, the name comes from the means of transport in which the given takings are transported.
• The sender sends the goods to the payer, and then submits documents confirming the shipment of the goods and authorizing its collection to the bank.
• The donor's bank sends the received documents to the intermediary bank.
• The collecting bank confirms receipt of the documents to the payer's bank and sends the payer a request to purchase the collection together with a copy of the commercial invoice.
• When the collection documents are received by the bank, the payer receives further instructions from the bank. If he meets them, he will receive the documents that are the subject of the collection. After meeting the collection conditions, i.e. payment or acceptance of the bill of exchange, the payer collects the documents and thus is entitled to dispose of the goods.
• The Bank is limited only to intermediation in the transfer of documents and payment. It does not check the authenticity of commercial documents and is not obliged to make payments from its own funds. He is only responsible for handling the documents received strictly in accordance with the instructions of the sender.
• for the payer - before making the payment, he can see and evaluate the documents being the subject of the collection and only then make the payment; the ability to make payments after delivery of the goods to the destination - does not require the involvement of funds in advance
• for the applicant - he is sure that the documents will not be released to the importer until he meets the conditions contained in the collection order.
• collection is a risk for the seller, as the buyer may refuse to pay,
• the buyer is not sure whether the seller has fulfilled all the terms of the contract.

Collection steps

• The sender sends the goods to the payer, and then submits documents confirming the shipment of the goods and authorizing its collection to the bank.
• The donor's bank sends the received documents to the intermediary bank.
• The collecting bank confirms receipt of the documents to the payer's bank and sends the payer a request to purchase the collection together with a copy of the commercial invoice.
• When the collection documents are received by the bank, the payer receives further instructions from the bank. If he meets them, he will receive the documents that are the subject of the collection. After meeting the collection conditions, i.e. payment or acceptance of the bill of exchange, the payer collects the documents and thus is entitled to dispose of the goods.
• The Bank is limited only to intermediation in the transfer of documents and payment. It does not check the authenticity of commercial documents and is not obliged to make payments from its own funds. He is only responsible for handling the documents received strictly in accordance with the instructions of the sender.

Benefits of collection

• for the payer - before making the payment, he can see and evaluate the documents being the subject of the collection and only then make the payment; the ability to make payments after delivery of the goods to the destination - does not require the involvement of funds in advance
• for the applicant - he is sure that the documents will not be released to the importer until he meets the conditions contained in the collection order.

Cons of collection

• collection is a risk for the seller, as the buyer may refuse to pay,
• the buyer is not sure whether the seller has fulfilled all the terms of the contract.

 

Source: Dobosiewicz Z. (2005), Bankowość, Owsiak S. (2015), Finanse