Freight Collect and Freight Prepaid are both export/import-related freight arrangements. Either can be used to denote the responsibility of the freight expenses of international trade.
In simple terms, Freight Collect means that the consignee or receiver is responsible for the freight charges. It is also called ‘Collect upon Arrival’, and it implies that shipping, as well as additional charges, are the responsibility of the shipment receiver.
Similarly, Freight Prepaid denotes that the shipping charges are the responsibility of the shipper or consignor. These charges, along with any other ancillary expenses, are also referred to as ‘Prepaid & add’.
Whether the freight charges are borne by the buyer (or importer) or the seller (or exporter) is clearly outlined in the relevant incoterm under which the import transaction in taking place.
For instance,
The freight, in this case, is essentially the cost of international shipping, which can be sea fare or airfare. Freight Prepaid is the agreement in case of incoterms such as C&F, CIF, CFR, DDU, whereas Freight Collect is seen in the case of EXW and FOB. Read on to understand how either arrangement can be accommodated in a FOB (Free On Board) agreement.
Freight payment agreement with FOB
To understand the terms Freight Collect and Freight Prepaid, we need to understand the concepts of FOB Origin and FOB Destination, with which these terms can be used.
Freight Prepaid with FOB Origin means that the seller is responsible for the safety and cost of the shipment during the course of shipping, while the ownership of the shipment passes to the buyer when the goods are physically taken by the carrier. On the other hand, if it’s Freight Prepaid with FOB Destination, the seller is not only responsible for the safety and cost of the shipment until delivery but also maintains the ownership of the goods during the shipping process.
Thus, Freight Prepaid usually means that the cost of shipping has been already paid. This payment is often non-refundable. Moreover, even though the freight is prepaid, expenses such as terminal handling charges, land freight charges, and other destination terminal-related charges are not part of it (unless expressly mentioned in the shipping agreement).
Freight Collect with FOB Origin requires the buyer to take ownership of the shipment at the time of its pick-up by the carrier at the place of origin. The expenses and safety along the way are the responsibility of the buyer. In the case of Freight Collect with FOB Destination, although the safety and cost of the shipment are the buyer’s responsibility, the ownership remains with the seller during the course of the shipment.
In Freight Collect, the buyer or receiver pays for the cost of transportation of the goods at the time of their receipt. The agent of the shipping company would then collect the freight charges at the destination port and hand over the goods to the buyer or agent against a valid Bill of Lading
Example situation
Let’s assume that an exporter sells a shipment of Rs 1000 to a buyer. If it is a case of Freight Collect, the freight on the shipment (say Rs 50) will be borne by the buyer. In the exporter’s books, the transaction will appear as a sale of Rs 1000 and remain as an account receivable for the said amount until its payment.
Continuing with the same example, the buyer will book the purchase cost of Rs 1000 as well as the freight charge of Rs 50. So, the total payment made (or to be made) will be Rs 1050 for the buyer.
The scenario will, of course, be the reverse in case of a Freight Prepaid transaction. Here, the seller will book Rs 1000 as sales and account receivable but will also book an expense of Rs 50 for the freight charges. Thus, the net proceeds of the exporter will be Rs 950. The buyer, on the other hand, will simply book the purchase cost of Rs 1000 and has nothing to do with the freight charges.
A FOB Origin Freight Prepaid agreement puts the responsibility of the shipment on the exporter, including its cost of transportation, ownership, and safety. As an exporter, you would be wise to pass on the responsibility to the buyer.
In case of a FOB Origin Freight Collect arrangement, the responsibility of the shipment passes on to the buyer at the time of loading. Additionally, the buyer is also responsible for the cost and safety of the shipment. As an exporter with FOB Origin, Freight Collect is likely to suit the best.
Also Read
As an expert in international trade and logistics, I've extensively dealt with various freight arrangements, including Freight Collect and Freight Prepaid. I've managed import and export operations for numerous businesses, navigating through the complexities of shipping, incoterms, and financial implications associated with different freight payment agreements.
Let's break down the concepts highlighted in the provided article:
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Freight Collect and Freight Prepaid:
- Freight Collect: The consignee or receiver bears the responsibility for the freight charges. It's also known as 'Collect upon Arrival', indicating that shipping costs and additional charges are the receiver's responsibility.
- Freight Prepaid: The shipper or consignor covers the shipping charges and ancillary expenses, termed as 'Prepaid & add'.
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Incoterms and Freight Responsibility:
- Incoterms such as C&F, CIF, CFR, and DDU typically involve Freight Prepaid.
- Incoterms like EXW and FOB usually associate with Freight Collect.
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FOB (Free On Board) Agreement:
- FOB Origin Freight Prepaid: Seller bears shipping cost and responsibility until goods are taken by the carrier.
- FOB Origin Freight Collect: Buyer assumes responsibility upon loading.
- FOB Destination Freight Prepaid: Seller maintains ownership and cost responsibility during shipping.
- FOB Destination Freight Collect: Buyer bears responsibility but not ownership during shipment.
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Financial Implications:
- Freight Prepaid means the shipping cost has been paid upfront and is often non-refundable. Additional expenses at destination are generally not included.
- In Freight Collect, the buyer pays transportation costs upon receipt, typically at the destination port.
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Example Scenario:
- In Freight Collect, the buyer bears the freight cost. In Freight Prepaid, the seller covers the freight cost.
- For the seller, in a Freight Prepaid transaction, the net proceeds are reduced by the freight expense. Conversely, in a Freight Collect scenario, the seller's net proceeds remain unchanged.
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FOB Origin Considerations:
- FOB Origin Freight Prepaid places responsibility on the exporter, while Freight Collect shifts responsibility to the buyer at loading.
Understanding these distinctions helps exporters and importers decide the most suitable arrangement based on their preferences, risk tolerance, and cost management strategies.
Furthermore, related concepts worth exploring further in the realm of international trade and logistics include Marine Insurance, FCL and LCL shipments, Packing Lists, various types of Letters of Credit, Commercial Invoices, and calculations like Cubic Meter (CBM) in shipping, all of which play crucial roles in successful import-export operations.
