Legal Definitions - collection item

A collection item refers to a financial document or instrument that a bank accepts from a customer with the specific understanding that the funds associated with it will not be immediately available in the customer's account. Instead, the bank acts as an agent, taking on the responsibility to present the item to the payer (the person or entity obligated to pay) and will only credit the customer's account once the payment has been successfully received and cleared from the payer's bank. This process is typically used when there's a need to ensure the legitimacy and receipt of funds before they are released to the customer, often due to the nature of the item, the amount involved, or the parties making the payment.

Here are a few examples to illustrate this concept:

• International Trade Transaction: Imagine a small manufacturing company in the United States that sells specialized machinery to a buyer in a different country. To ensure payment before the expensive machinery leaves the port, the US company's bank might receive a "documentary collection" on their behalf. This collection includes documents like the bill of lading (proof of shipment) and a draft (an order to pay). The US company's bank treats this as a collection item. It will not credit the company's account until the buyer's bank confirms that the buyer has paid for the machinery and accepted the draft. This process ensures the seller is paid before the buyer gains control of the goods, mitigating risk for the seller.

• Deposit of a Large, Non-Standard Check: A person sells a rare antique coin collection to a buyer in another state. The buyer provides a cashier's check for a substantial amount from a small, regional bank that the seller's bank doesn't have a direct relationship with. When the seller deposits this cashier's check into their account, their bank might process it as a collection item. Even though it's a cashier's check, due to the large sum and the unfamiliar issuing bank, the seller's bank will send the check to the issuing bank for verification and payment. The funds will not be available in the seller's account until the issuing bank confirms the payment and the funds are actually transferred, protecting the seller from potential fraud or delays.

• Payment on a Promissory Note: A small business loaned money to another company and holds a promissory note, which specifies a payment date. On the due date, the borrower provides a check for the principal and interest. When the small business takes this check to its bank for deposit, the bank might treat it as a collection item. Given that this is a payment on a specific financial instrument and potentially a significant amount, the bank will send the check to the borrower's bank for payment. Only once the funds are confirmed as received and cleared from the borrower's bank will the money become available to the small business, ensuring the payment is legitimate and fully processed before it's accessible.