Freight Prepaid vs Freight Collect: What’s The Difference

07.22.24
7 min read

Freight Prepaid means the seller handles and pays for the shipping costs until delivery, while Freight Collect requires the buyer to pay the shipping costs and take responsibility once the goods leave the seller’s location.

Shipping goods involves various considerations and understanding the shipping terms is crucial for businesses or individuals that need to transport goods. Two of the most common terms encountered in the shipping industry are freight prepaid and freight collect. These terms define who pays for the shipping costs and who bears the responsibility during transit.

Let’s explore the differences between them and how they affect the overall freight shipping process.

What is Freight Prepaid?

Freight prepaid is a shipping arrangement where the shipper (seller) is responsible for paying the freight charges. This means that the cost of shipping is included in the price of the goods, and the shipper pays the carrier upfront for the transportation of the goods from the shipping point to the final destination.

Here are some key points to understand about Freight Prepaid:

FOB Destination: In Freight Prepaid terms, the shipment is often classified under FOB (Free on Board) Destination. This means that the seller retains responsibility and ownership of the goods until they reach the buyer’s receiving dock.
Shipping Costs: The shipping costs are included in the purchase order, and the seller pays the freight charges. This can simplify the accounting process for the buyer, as they only need to handle the payment to the seller.
Cash Flow: Freight Prepaid can positively impact the buyer’s cash flow, as they do not have to pay the carrier directly. The costs are typically included in the invoice provided by the seller.
Shipping Contract and Terms: The shipping contract will specify that the seller is responsible for the transportation costs, and the bill of lading will indicate Freight Prepaid. The seller will work with the freight carrier to manage the shipment.

Pros and Cons of Freight Prepaid

Freight Prepaid offers significant advantages for buyers, primarily by providing convenience and simplifying the shipping process. In this arrangement, the seller handles all shipping logistics, allowing buyers to focus solely on receiving their goods without worrying about shipping details or paying freight charges upon delivery. This method builds trust between buyers and sellers, as customers are relieved from managing shipping payments.

However, Freight prepaid presents disadvantages for sellers. Sellers need a thorough understanding of shipping logistics and must negotiate favorable rates with carriers, adding complexity to their operations. Additionally, sellers must manage the risk of damage or loss during transit until the goods are delivered. While the shipper retains control over the shipping process and can select the carrier and shipping method, they must bear the upfront costs of shipping, which can impact cash flow.

What is Freight Collect?

Freight collect indicates that the buyer (receiver) is responsible for the freight charges. In this scenario, the buyer pays the shipping costs upon delivery of the goods.

Key aspects of Freight Collect include:

FOB Origin: In Freight Collect terms, the shipment is often associated with FOB Origin (or FOB Shipping Point). This means that the buyer takes responsibility and ownership of the goods as soon as they leave the seller’s shipping point.
Freight Costs: The buyer pays the freight charges directly to the carrier. This can result in additional shipping charges that the buyer needs to manage, including ancillary charges such as customs fees or handling fees for international shipments.
Cash Flow: Freight Collect can affect the buyer’s cash flow, as they must have funds available to pay for the shipping costs upon delivery.
Shipping Process and Documents: In a Freight Collect arrangement, the shipping process involves the buyer working directly with the carrier. The purchase order and bill of lading will indicate Freight Collect, transferring the responsibility of payment to the buyer.

Pros and Cons of Freight Prepaid

Freight Collect offers several advantages, particularly for shippers, by improving cash flow since they do not need to pay shipping costs upfront. This arrangement provides flexibility for consignees, allowing them to choose carriers and shipping methods, potentially negotiating better rates. Consignees also gain cost control, managing shipping expenses according to their preferences, which can be beneficial if they have established relationships with carriers.

However, there is a risk of non-payment if consignees refuse to pay freight charges upon delivery. This method introduces an administrative burden and may limit available shipping options, reducing flexibility and efficiency.

While buyers benefit from more control over the shipping process, including the ability to choose carriers and negotiate rates, they must also handle more logistics, paperwork, and responsibility for any issues during transit.

Comparing Freight Prepaid and Freight Collect

The primary difference between freight prepaid and freight collect lies in who is responsible for paying the shipping costs. However, this difference has broader implications for the shipping process, cash flow, and risk management. Let’s compare these terms based on various factors:

Freight Prepaid places the responsibility and risk on the seller until delivery, with the buyer paying the seller, who then pays the carrier. This can simplify accounting for the buyer but requires the seller to manage shipping payments and logistics. On the other hand, Freight Collect transfers the responsibility and risk to the buyer once the goods leave the seller’s shipping point. The buyer pays the carrier directly, providing more control over shipping processes and costs, but requiring more immediate cash flow and administrative effort.

Both methods have their pros and cons, and the choice between the two will depend on the factors above. By carefully evaluating these factors, shippers can select the most suitable option for their logistics and financial strategies.

Things to Consider When Choosing Between Freight Prepaid and Freight Collect

When deciding whether to use freight prepaid or freight collect, businesses should consider several factors:

Nature of the Goods: For high-value or fragile goods, buyers might prefer Freight Collect to ensure they have more control over the shipping process and can choose trusted carriers.
Shipping Distance: For international shipments, Freight Collect can help buyers manage customs and other additional fees more effectively.
Carrier Relationships: Buyers with strong relationships with carriers may benefit from Freight Collect, as they can negotiate better rates and manage shipping logistics efficiently.
Cash Flow Management: Freight Prepaid can be advantageous for buyers looking to manage cash flow, as the payment is consolidated into the purchase order.
Contractual Terms: Clear contractual terms should be established to avoid disputes. The shipping agreement should specify the responsibilities of both parties and outline the payment terms and any additional charges.
Legal and Regulatory Compliance: Both international and domestic shipments must comply with relevant regulations. Shippers should ensure that the chosen freight terms align with legal requirements and industry standards.

Conclusion

Understanding the differences between freight prepaid and freight collect is essential for businesses to make informed decisions about their shipping processes. Both have their advantages and disadvantages, and the choice depends on various factors including the nature of the goods, shipping distance, carrier relationships, cash flow considerations, and contractual terms.

Freight Prepaid offers convenience and simplified accounting for buyers, with the seller managing the shipping costs and process. However, it requires the seller to handle logistics and bear the risk until delivery.

On the other hand, Freight Collect provides buyers with more control over the shipping process and potential cost savings through direct negotiations with carriers, but it also demands more immediate cash flow and responsibility.

Whether you are shipping domestically or internationally, having a clear understanding of these terms and their implications can help you optimize your shipping strategy, improve cash flow, and maintain strong business relationships.

Mercer is Here to Help

Mercer Transportation has been a trusted name in the shipping industry for over 45 years. We handle everything from matching you with a reliable shipping carrier to managing your freight bills, ensuring a smooth and efficient shipping process. Our expertise covers both Freight Prepaid and Freight Collect options, allowing us to tailor solutions to your preferences.

Contact us today to see how Mercer can support all your shipping needs, providing the reliability and expertise to keep your business moving forward.