Role of Documentary Collections and Proof of Funds Documents in Finance Trading
It is imperative to learn about documentary collection if you want to setup your business in finance trading. It is a document in a trade wherein proof of documents for the exported goods is shared by the exporter's bank. Next, this PoF is forwarded to the importer's bank for verification. Once verified, the bank shares this document with the importer following which the payment is initiated as per the contract.
In the realm of trade financing, Documentary Collections comprise two parts as follows:
1. Documents against Payment Collection (D/P): D/P documents are the ones that are received by the importer for the payment that needs to be made.
2. Documents against Acceptance Collection (D/A): D/A documents are the ones that are received by the importer for the acceptance of a Bill of Exchange (BoE).
What are Proof of Funds Documents?
Proof of Funds documents (PoF) is the one that guarantees that an importer has accessible and legitimate funds to be transferred once the shipping documents are provided. Generally, the financial institutions or banks issue a PoF to guarantee the exporter that funds will be transferred once the transaction is concluded.
In most cases, a PoF is available in the form of a bank statement assuring that the importer is financially independent and carries legal funds.
Difference between Proof of Funds Documents and a Standby Letter of Credit
Proof of Funds Documents
As we have already discussed, a PoF is an assurance that the importer is financially independent and carries accessible funds. To re-iterate this, a PoF certifies that the importer is capable of carrying the transaction as per the agreed contract. Let us try to understand this with the help of an example. Say, you are an exporter and want to ship certain goods as per the requirement received. Therefore, to conduct a safe business, you will require a PoF assuring that the buyer is capable of paying you against the goods shipped. Also, the funds are completely accessible and legitimate. To justify the authenticity of PoF, you would require the document to be issued by the buyer's bank.
Standby Letter of Credit
A Standby Letter of Credit (SBLC) is a legitimate document that assures the exporter a complete payment as per the contract even in the unlikely event where the importer defaults. The purpose of SBLC is to promote business relationships overseas along with compliance to foreign laws.
In other words, a Standby Letter of Credit may also be known as a contingency option where some unlikely events lead to the forfeiting from the importer's side. Therefore, in an event like this, an SBLC guarantees a complete payment to the exporter as per the agreement.
Documents qualifying as PoF
Following are the documentary collections that constitute the PoF:
Bank's name and address
Financial statement approved by the bank
Documents to validate a balance of funds
Bank statement
Money market statement and balance documents
Statement for online banking
An authorized signature of the bank employee
In the fast-paced world, the volume of financial trading is continuously reaching new limits inviting greater risks in the industry. This calls for the need to understand the concepts of Documentary Collections and a PoF. Also, learning about a Standby Letter of Credit can come in handy while making international transactions.
For more information visit our website: https://www.merchanttradecorp.com/
Merchant Trade Guarantee Corporation Company Limited (MTG)
Phone: +66 651209539
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