Corporate and Business Law (Global) · Transportation documents and means of payment

Bills of Exchange and Documentary Collections in International Trade

Updated 11 October 2026 · Fact-checked

Besides letters of credit, international buyers and sellers can pay by advance payment, open account, or documentary collection using a bill of exchange. Each method shifts risk between seller and buyer. To answer questions, identify who holds the goods, the documents or the money at each point, then name who carries the risk.

Understand Other Means of Payment: Bills of Exchange and Collections

International sellers and buyers often do not know or trust each other. Payment method decides who takes the risk of non-payment and who takes the risk of non-delivery. A letter of credit is one method. This topic covers the others.

A bill of exchange is a written, unconditional order. One person (the drawer) tells another (the drawee) to pay a fixed sum to a named person (the payee), either on demand or at a set future date. In trade, the seller is usually the drawer and the buyer is the drawee. A bill payable on sight is a sight bill. A bill payable at a later date is a term (usage) bill. Once the drawee signs it as accepted, the drawee is legally bound to pay on the due date.

In a documentary collection, the seller ships the goods and sends the shipping documents and a bill of exchange to its own bank (the remitting bank). That bank passes them to a bank in the buyer's country (the collecting bank). The collecting bank releases the documents, including the bill of lading that gives control of the goods, only on the stated terms. The banks act as agents handling documents. They do not guarantee payment. That is the main difference from a letter of credit.

There are two types. Documents against payment (D/P): the buyer gets the documents only by paying. Documents against acceptance (D/A): the buyer gets the documents by accepting a term bill, promising to pay later. D/P is safer for the seller. D/A gives the seller less protection because the buyer holds the goods before paying and the seller relies on the buyer's acceptance.

Two simpler methods sit at the ends of the risk scale. Advance payment: the buyer pays before shipment. The seller is safest and the buyer carries all risk of non-delivery or wrong goods. Open account: the seller ships and sends the documents directly to the buyer, who pays on agreed credit terms, for example 60 days. The buyer is safest and the seller carries all risk of non-payment. Open account suits trusted, long-standing partners.

Key formulas to remember

Bill of exchange parties: Drawer (orders payment) → Drawee (pays) → Payee (receives); In a typical trade bill the seller is drawer and payee, and the buyer is drawee.
Documentary collection D/P: Payment first → documents released → goods collected; Seller keeps control of the goods until the buyer pays. Banks do not guarantee payment.
Documentary collection D/A: Acceptance of term bill → documents released → payment at maturity; Buyer gets the goods before paying. The seller relies on the buyer's acceptance.
Risk ranking for the seller (safest to riskiest): Advance payment > letter of credit > D/P > D/A > open account; The buyer's risk runs roughly in the opposite direction. This is a guide, not a rule that applies to every deal.

How to solve Other Means of Payment: Bills of Exchange and Collections questions

Use this method for any question on payment methods or bills of exchange.

1Identify the parties: seller, buyer, and the banks involved, if any.
2Identify the method: advance payment, open account, D/P, D/A or letter of credit. Look for words such as 'accept', 'against payment' or 'on credit terms'.
3Trace the timeline: when does the buyer receive the documents, when do the goods move, and when is money paid?
4Decide who holds control of the goods or documents at each point, especially the bill of lading.
5Name the risk for each side: non-payment for the seller, non-delivery or poor goods for the buyer.
6Check whether a bank guarantees payment. In collections it does not.
7Give the answer in the form asked: choose the option, state the difference, or recommend a method with a reason.

Quickest way: Who pays first, who holds the goods

When to use it: Use for Section A and Section B objective questions where you must pick a method or its risk.

Ask: who pays or ships first?
If the buyer pays first, the buyer bears the risk (advance payment).
If the seller ships and the buyer pays later with no bank, the seller bears the risk (open account).
If banks pass documents, check the release condition: payment means D/P, acceptance means D/A.
Reject any option claiming a bank guarantees payment under a collection.

Common mistakes in Other Means of Payment: Bills of Exchange and Collections

Saying a bank guarantees payment in a documentary collection.
Students mix collections up with letters of credit, where the bank gives its own undertaking.
Fix: Remember that collection banks only handle documents and follow instructions. Only a letter of credit gives a bank payment undertaking.
Mixing up D/P and D/A.
The letters look alike.
Fix: P is for payment: buyer pays to get documents. A is for acceptance: buyer signs a term bill to get documents and pays later.
Saying open account is safest for the seller.
It sounds like a simple, normal sale.
Fix: Open account is the riskiest for the seller, because goods and documents go to the buyer before payment.
Confusing drawer and drawee.
The words are similar.
Fix: Drawer draws up the bill and orders payment. Drawee is the one told to pay. In trade the buyer is the drawee.
Ignoring the buyer's risk.
Students think only about the seller getting paid.
Fix: Always give both sides. In advance payment, the buyer risks paying and receiving nothing or wrong goods.

Worked examples

Example 1

A seller in Country X ships goods to a buyer in Country Y. The seller's bank sends the shipping documents and a 60-day term bill of exchange to a bank in Country Y. The buyer receives the documents by signing the bill as accepted and will pay in 60 days. Identify the method and the main risk to the seller.

Show the solution

Banks pass the documents and a bill, so this is a documentary collection, not open account.
The buyer gets the documents by accepting a term bill. That is documents against acceptance (D/A).
With the documents, including the bill of lading, the buyer can take the goods before paying.
The banks do not guarantee payment.
So the seller depends on the buyer paying at maturity.

Answer: It is a D/A documentary collection. The seller's main risk is that the buyer does not pay at maturity after taking the goods, and no bank guarantees payment.

Example 2

A buyer is new to a seller and the seller has no information on its creditworthiness. The seller wants the lowest risk of non-payment. The buyer will not use a letter of credit. Which is the better choice between open account and documents against payment, and why?

Show the solution

Open account: goods and documents go straight to the buyer, who pays later. The seller has no control and no bank involvement.
D/P: the collecting bank releases the documents only when the buyer pays.
Without the documents, the buyer normally cannot collect the goods, so the seller keeps control until payment.
D/P still gives no bank guarantee, and the buyer could refuse to pay. The seller would then have goods abroad to redirect or return.
Even so, D/P leaves the seller far better protected than open account.

Answer: D/P is better. The seller keeps control of the goods through the documents until the buyer pays. Open account leaves the seller fully exposed. Advance payment or a letter of credit would be safer still.

Exam tips

In objective questions, look for the release condition: payment means D/P, acceptance means D/A.
Always state who bears the risk. Examiners test the risk position, not just the definition.
Remember that banks in collections act as agents and give no guarantee.
In a scenario question, match the method to the relationship: trusted partner suggests open account, unknown buyer suggests advance payment, letter of credit or D/P.
Write the order of the risk ranking only as a guide and give the reason for it.

Practice questions from Transportation documents and means of payment

Other Means of Payment: Bills of Exchange and Collections in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediateDiscounting, Endorsement and Collection of Bills

Other Means of Payment: Bills of Exchange and Collections: frequently asked questions

What is the difference between D/P and D/A?

Under D/P (documents against payment), the buyer receives the shipping documents only after paying. Under D/A (documents against acceptance), the buyer receives them by accepting a term bill and pays at maturity. D/A gives the seller less protection.

Is a documentary collection the same as a letter of credit?

No. In a letter of credit the issuing bank undertakes to pay if the documents comply. In a collection the banks only pass documents and follow instructions, with no payment guarantee.

Which payment method is riskiest for the seller?

Open account is generally the riskiest for the seller, as goods and documents go to the buyer before payment. Advance payment is the riskiest for the buyer.

How do you choose a payment method in international trade?

Weigh trust, the buyer's credit standing, the value of the deal and the cost. Unknown parties usually need advance payment or a letter of credit. Trusted long-term partners may use open account. Collections sit in the middle.