Among all the arrangements needed for shipping cargo from point A to point B, freight prepaid and freight collect determine who pays the carrier and when. Let’s see what these freight terms really mean and why they’re important.
Choosing between freight prepaid and freight collect can make a huge difference in shipping efficiency and cost optimization.
Prepaid Freight – Meaning
Freight prepaid is a shipping arrangement where the consignor (shipper, seller, export freight forwarder, etc.) is responsible for paying all freight charges upfront to the carrier. These freight charges are often included in the overall invoice the consignee (or buyer) receives, which details the total cost of goods.
Freight prepaid is noted on the shipping documents, and it’s commonly used for small shipments or new partnerships.
Freight Collect – Meaning
Freight collect is a shipping setup where the recipient of the goods (buyer, import freight forwarder, or any other consignee) is responsible for paying the shipping costs and any extra freight fees and charges upon delivery. These costs are invoiced separately, and they are not included in the initial price of purchasing the goods.
In essence, the person who ‘collects’ the shipment at the end has to pay for the cost of its transit, as indicated on the Bill of Lading or Airway Bill.
However, shipping compliance experts argue that when talking about international freight, these terms are not extensively used; they’re not specific or detailed enough. They do not address things like terminals, loading, unloading, duty, taxes, brokerage, permits, etc., all of which are determined by the applicable Incoterms for each shipment.
But we’ll get to that further down. Meanwhile, it’s worth exploring the pros and cons of freight prepaid vs. collect options.
Advantages Of Freight Prepaid
- Cost Control: Shippers can select the ideal option among their network of partner carriers, negotiate favorable shipping rates, and reasonable surcharges.
- Simplified Process for consignees who don’t need to handle transportation-related payments and any administrative burdens after receiving their goods.
- Improved Customer Experience, without unexpected delivery charges for the buyer.
- Reduced Risk for shippers, doing away with potential disputes over freight charges or, even worse, non-payments.
Potential Disadvantages Of Freight Prepaid
Because shippers are responsible for arranging the entire cargo transport, they may face various drawbacks in prepaid freight arrangements:
- Upfront Costs can impact a shipper’s cash flow, particularly for smaller businesses.
- Higher Liability in case of damage or loss during transit.
- Increased Administrative Tasks, including arranging shipping, managing payments, and invoicing the buyer.
- Potential for Disputes: Although not common, disputes can occasionally arise when actual freight costs exceed the prepaid amount or if the buyer believes they could have secured a lower rate.
Advantages Of Freight Collect
- Enhanced Cash Flow For Consignees who can defer payment for shipping charges until the goods are received – a significant cash flow advantage, especially for tight budgets or large amounts of cargo.
- Reduced Administrative Burden For Shippers who don’t need to make all the arrangements, pay upfront shipping costs, and add them to the buyer invoice.
Potential Disadvantages of Freight Collect:
- Lack Of Control For Consignees who, in many cases, need to trust the shipper’s carrier selection.
- Potential Delays may occur when the consignee fails to pay shipping charges promptly upon delivery. This often leads to delays in releasing the goods and extra warehousing costs.
- The Trust Factor: Freight collect relies on a high degree of trust between shippers and buyers. For freight collect to run smoothly, the consignee must be ready and willing to pay the entire shipping charge.
- Customer Experience Issues: Unfortunate events like lost or mishandled products on the part of the carrier downgrade a shipper’s business reputation, even if they had no control over the process.
That’s why the collect freight terms work best in established partnerships.
The Role Of FOB & Incoterms In Freight Prepaid vs Collect
While freight prepaid and freight collect define who pays for shipping, they do not specify who owns the goods during transit or who is responsible for damage or loss.
These crucial details are defined by Incoterms, most notably Free On Board (FOB).
FOB specifies the “hand-off” point where ownership and liability for the freight transfer from the exporter to the importer. It’s an older shipping term, historically referring to the receiver picking up goods at dockside and taking title at that point.
Here’s how FOB terms often combine with freight payment methods:
- FOB Destination Point (Freight Prepaid): The seller retains ownership and responsibility for the goods until delivery to the buyer’s destination and pays all shipping fees.
- FOB Destination Point (Freight Collect): The seller retains ownership until delivery, but the buyer pays for transportation upon arrival.
- FOB Shipping Point (Origin), Freight Prepaid: The buyer assumes ownership, liability, and responsibility for the freight at the point of origin, while the seller pays for the shipping.
- FOB Shipping Point (Origin), Freight Collect: The buyer assumes ownership, liability, and responsibility for the freight at the point of origin, and also pays for the shipping.
Freight Prepaid vs. Freight Collect: Deciding Which Option Is Right for You
Choosing between freight collect and prepaid depends on your business needs, cash flow, relationship with trade partners, and the nature of the shipment.
On top of cash flow management, choosing a carrier, and assuming loss and damage risk, here are some more things to consider:
Destination &Size
When you have larger shipments (over 500 kg), full container loads (FCL), or when shipping to many different destinations, freight collect usually works best.
On the other hand, freight prepaid is more common for smaller shipments or when exporters want to simplify the process for the buyer, especially when they have just started a new partnership and wish to build trust.
Relationship With Trading Partners
Freight collect relies on a high degree of trust between parties, while freight prepaid covers the shipper from potential cash flow inconsistencies and disputes with their new trading partners.
Conversely, buyers who have been working with a specific supplier for quite some time trust that their partners overseas will choose the right carriers to transport and handle their shipment with care – in which case it’s easier to opt for collect arrangements.
Expected Additional Charges
Freight prepaid is ideal for shipments unlikely to incur ancillary charges, and vice versa.
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