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Collection basis is a payment arrangement used when shipping goods internationally. Under a collection basis agreement, the buyer cannot receive the goods until payment has been released to the seller. This type of agreement helps ensure the seller will not lose a substantial sum of money, which could occur if the buyer picks up the goods and then fails to pay. A collection basis payment agreement is typically used when the buyer is not able to provide a standard letter of credit from a bank, but the seller is still relatively sure the buyer has the means and intent to pay for the goods.
A letter of credit serves as the most common payment agreement used in international trade. With a letter of credit, the buyer has his bank send a certified letter to the seller stating that he has the funds available to pay for the goods. The bank will then place a hold on these funds until the seller has shipped the goods and they have been received by the buyer. At this point, the bank automatically releases the money to the seller. With a letter of credit agreement, both parties are protected against fraud or non-payment.
There are three basic types of collection basis arrangements for buyers and sellers to choose from when trading across international borders. Under a sight collection basis, the shipping agent holds the goods until payment has been sent to the seller. This can be accomplished by the buyer simply bringing payment when he picks up the goods at the shipping facility, or by sending payment directly to the seller. The seller then alerts the shipping agent that it is acceptable to release the goods.
Under a time draft collection basis, the buyer is permitted to pick up the goods simply by signing a payment draft on contract in his home country. He can then pay for them later, which serves as a form of extending credit. This type of arrangement helps protect the seller in countries with unique business laws, where a simple invoice or order information may not be sufficient to enforcement payment from fraudulent buyers.
Finally, certain countries allow for a clean draft collection basis. Under this agreement, the seller's banking agent sends the invoice or draft directly to the buyer's bank. Once the bank receives this draft, the buyer is free to pick up the goods, even if he has not yet paid for them.