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Freight collect vs freight prepaid: Everything you need to know

Freight collect and freight prepaid are shipping arrangements for payment of freight charges. Learn more about key differences in this blog.

When it comes to international shipping, being aware of the entire logistics process and understanding financial aspects is important. One key aspect of shipping arrangements is determining who is responsible for the payment of freight charges. This is where the terms freight prepaid and freight collect come into play. Understanding the difference between these two terms will help businesses make decisions best suited for global trade.

What is freight collect?

Freight collect refers to a shipping arrangement where the consignee (customer or recipient of goods) is responsible for paying shipping charges upon delivery. The consignee is required to settle freight charges directly with the carrier or shipping agent. This is usually mentioned on shipping documents as ‘freight collect’.

Pros and cons of freight collect

Below are a few advantages and disadvantages of freight collect:

Pros

A) Cash flow advantage:

With freight collect, the consignee can defer payment for shipping charges until the goods are received, providing a cash flow advantage.

B) Negotiating power:

The consignee has more leverage in negotiating shipping rates directly with the carrier or shipping agent.

Cons

A) Lack of control:

The consignee may have limited control over carrier selection, as the shipper usually determines the carrier.

B) Potential delays:

If the consignee fails to pay shipping charges promptly, it can lead to delays in releasing goods.

What is freight prepaid?

Freight prepaid or prepaid freight refers to a shipping arrangement where the shipper (seller or sender of goods) pays shipping charges in advance. The shipper includes freight charges in the overall cost of the goods and arranges for a carrier to transport goods to the consignee without any additional payment required during delivery. This arrangement is usually indicated in shipping documents as ‘freight prepaid’.

Pros and cons of freight prepaid

Below are a few advantages and disadvantages of freight collect:

Pros

A) Cost certainty:

The shipper has control over carrier selection and can negotiate favorable shipping rates, providing cost certainty in freight prepaid incoterms.

B) Expedited delivery:

Prepaid freight ensures fast delivery times as the carrier is already paid and has a vested interest in timely delivery.

Cons

A) Cash flow disadvantage:

The shipper needs to bear upfront cost of shipping in case of prepaid freight, which can impact cash flow, especially for small businesses.

B) High liability:

If any issue arises during transit, such as damage or loss, the shipper needs to bear the responsibility to handle claims and insurance matters in case of prepaid freight.

Freight payment agreement with FOB

It is important to note that the terms freight prepaid and freight collect can also be associated with International Chamber of Commerce’s Incoterms, specifically the Free on Board (FOB) term. FOB indicates when the risk and responsibility transfer from the seller or exporter to the buyer or importer. Under FOB, ‘freight collect’ means the buyer is responsible for freight charges after goods have been loaded onto the vessel, while ‘freight prepaid’ means that the seller bears the cost of shipping till that point.

Example of prepaid freight

Consider that there is a manufacturer based in Country A who received an order from a retailer in Country B. As part of their agreement, they decided to use a prepaid freight arrangement. The manufacturer takes responsibility for paying shipping charges upfront and includes it as part of the overall cost of goods. They negotiate favorable shipping rates with a carrier and arrange for goods to be transported to Country B. Upon delivery, the retailer does not need to pay any additional shipping charges since it was already prepaid by the manufacturer.

Example of freight collect

Consider a consignee, a wholesaler in Country X, who placed an order for goods from a supplier in Country Y. The consignee and supplier agree on a freight collect arrangement. The supplier ships goods using a chosen carrier and marks the shipping documents as ‘freight collect’. Once the goods arrive at the destination port in Country X, the carrier informs the consignee about the arrival and presents shipping charges. The consignee is responsible for settling freight charges directly with the carrier before the goods can be released.

Freight collect vs freight prepaid

The decision to choose between freight collect and freight prepaid depends on specific needs and circumstances of your export business. Below are a few key factors that can help you determine the most suitable option for your shipping needs²:

Cash flow

With freight collect, consignee has the advantage of deferring payment for shipping charges until the goods are received. This can provide a cash flow advantage, especially for businesses that prefer to delay expenses until they have generated revenue from the goods. Prepaid freight requires the shipper to bear upfront cost of shipping charges. This can impact cash flow, particularly for small businesses.

Control

Freight collect may limit the consignee’s control over carrier selection, as the shipper typically determines the carrier. Prepaid freight allows the shipper to have more control over carrier selection and negotiate favorable shipping rates.

Risk and liability

With freight collect, the consignee assumes the risk and liability for any issues or damages that may occur during transit. Prepaid freight places the responsibility for any issues during transit, such as damage or loss, on the shipper.

Efficiency and speed

Freight collect can result in delays if the consignee fails to pay shipping charges on time. Prepaid freight often results in faster delivery time as the fees have already been paid.

Freight collect and freight prepaid are two distinct shipping arrangements that have different implications for both shippers and consignees. It is important to understand the advantages and disadvantages of both while making a decision. With such arrangements and other latest logistics programs, exporting from India has become simple and seamless. E-commerce exports enable easy exports without having to set up warehouses or stores abroad.

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Frequently Asked Questions

Is CIF freight collect or prepaid?

CIF (Cost, Insurance, and Freight) is a term used in international trade where the seller is responsible for costs and freight charges to deliver goods to the port of destination.

Is FCA freight collect or prepaid?

Free Carrier (FCA) is an incoterm where the seller is responsible for delivering goods to the carrier or another party nominated by the buyer at a specified location. It is important to clearly define the terms of freight payment within the FCA agreement.

What is FOB, C&F, and CIF costing?

FOB (Free on Board), C&F (Cost and Freight), and CIF (Cost, Insurance, and Freight) are commonly used trade terms that determine the transfer of risk and responsibility between the importer and the exporter. FOB indicates that the exporter is responsible for goods until they are loaded onto the vessel, while C&F and CIF involve the exporter being responsible for cost and freight charges to deliver the goods to the port of destination.

Is FOB the same as freight collect?

No, FOB (Free on Board) and freight collect are not the same. FOB refers to a trade term that indicates the point at which the risk and responsibility transfer from the exporter to the importer. Freight collect, on the other hand, specifically refers to the payment arrangement for shipping charges.

Published on May 25, 2023.

Sources:
1. https://www.atsinc.com/blog/freight-prepaid-freight-collect-definitions-differences
2. https://www.dripcapital.com/en-in/resources/blog/freight-collect-and-freight-prepaid
3. https://www.marineinsight.com/maritime-law/what-is-freight-collect-in-shipping/

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