If you ever had the chance to look at a bill of lading, you will see the phrase “Freight Collect” or “Freight Payable” and “Freight Prepaid” printed at the bottom. Freight charges generally refer to a nominal amount of money charged for transporting cargo, or “freight”.
Generally speaking, “Freight Prepaid” refers to the notion where carriers collect the freight charges BEFORE performing the contract of carriage, usually from the shipper; Whereas “Freight Collect” refers to the notion where carriers collect the freight charges AFTER performing the contract of carriage, usually from the importers.
From the get-go, we think it is best to clarify that freight charges are one of many other charge items that both shipper and importer are liable for. We have the following charges: –
- Documentation Fee
- Terminal Handling Charges
- EDI Transmission Fee
- Container Cleaning Charges
- Telex Release Fees
- Ocean Freight Charges
Freight Charges does not include all of the above, but only refers to the ocean freight charges, the charge for the ACTUAL voyage journey of the cargo.
With that said, we have to be mindful that both “Freight Collect” and “Freight Prepaid” only refers to the relevant ocean freight charge only.
Straight forward as it is, we think that we can do better, by elaborating further on Freight Terms, explain the documents affect by the freight term, and study when it is best to use either of those freight terms.
What is Freight Collect
A freight term that is “Freight Collect” indicates that the importer is responsible for the payment of the carrier’s ocean freight.
Under this arrangement, the carrier will prepare an arrival notice as well as an invoice for freight charges and landside charges.
In some circumstances, the freight forwarder or the forwarding agent will duly make the payment on behalf of the importer. In other scenarios, the importers will make the payment themselves.
In exchange, the carrier will issue the delivery order to the nominated party, albeit the freight forwarder, forwarding agent or the importer. The delivery order’s objective is to signify that all due charges are settled and the bill of lading is considered duly discharged.
Only when the importer or its nominated party had finished these steps, where the cargo is released to them. Additionally, in this freight term arrangement, the carrier has the right to hold a lien over the goods until the freight payment is done.
A Freight Collect is closely tied to the INCOTERM rule laid out by the International Chamber of Commerce (ICC).
The INCOTERM delegates the costs and risks associated with the transportation of goods between the importer and exporter. They are notated with 3 letters according to a well-maintained guideline by the ICC. The most updated guideline to date is the INCOTERM 2020.
The way that importers and exporters can easily and clearly communicate who is responsible for the freight charges is via the INCOTERM
For a freight collect term, the relevant INCOTERMs are: –
- EXW – Ex Work
- FOB – Free on Board
- FCA – Free Carrier
- FAS – Free Alongside Ship (for non-containerized goods)
All four of the INCOTERMs above does not place the responsibility of handling the contract of carriage on the seller.
What is Freight Prepaid
In a Freight Prepaid Arrangement, instead of the importer, the exporter is responsible for carrying out the contract of carriage and making the ocean freight payment.
All of the aforementioned procedures still apply for Freight Prepaid. Once the vessel arrives at the port of discharge, they will duly issue an arrival notice as well as an invoice to the nominated party or the importer themselves.
Despite the freight prepaid terms, the importer still has to bear other documentation and handling charges at the port of discharge.
The importer will be able to collect the cargo after the releasing of the bill of lading and paying the due amount to the carrier.
Similarly, this freight term follows the arrangement of INCOTERM, set out by the ICC.
For a freight prepaid term, the relevant INCOTERMs are: –
- DPU – Delivery Place Unloaded (2020 rule)
- DDP – Delivery Duty Paid
- Delivery at Place – DAP
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
Additional Reading: What is an INCOTERM
When to use Freight Collect or Freight Prepaid
INCOTERMs go hand-in-hand with freight terms because it defines clearly who is responsible for which section of cost and risk associated with the transport.
Nevertheless, correlation does not mean causation. It is NOT true that the shipment’s freight term has to follow in accordance with the INCOTERM set forth.
For example, in a DDU/DDP/DAP shipment, the responsibility of the carriage of goods lies on the seller. So, what is stopping the seller from arranging a freight prepaid over a freight collect?
It is a similar situation with an Ex-Work shipment, where the responsibility of the carriage of goods lies on the buyer. It is also up to the buyer’s choice to choose either a freight prepaid or freight collect.
Therefore, we can surmise that INCOTERMs are not the main reason for choosing a freight term, although in some cases such as CIF, CNF, and FOB where it is.
This may not be a very significant factor for the shipment of 1 or 2 containers, but if a bill of lading includes 200-300 containers, the currency factor plays an important role.
Ocean Freights are largely quoted in USD and converted to the local currency for billing purposes.
It is common for companies to have a currency hedge in order to mitigate the risks of currency fluctuations.
For example, a large shipment has been arranged by Seller A from Port Los Angeles to Port Antwerp for 350 containers worth of sunflower oil to Importer B.
The INCOTERM arranged is an Ex-Work shipment, where importer B has to take care of all the shipping arrangements.
The ocean freight rate importer B negotiated for is USD 280.00 per 20’ container, which amounts to USD 98,000 in Ocean Freight.
In anticipation of this shipment on March 1st, importer B has purchased a currency future of USD 98,000 for 1.14 USD per EUR on February 26th.
On the day of the shipment, March 1st, Importer B realized that the current currency rate is 1.04 USD per EUR. Conclusively, The EUR value has increased over the USD.
Following the increase in EUR value, if the contract of carriage has been arranged as freight prepaid and is not negotiable to change to freight collect, importer B can choose to exercise the currency futures they previously purchased at 1.14 USD per EUR
The net savings he has made will be (1.14-1.04) x USD 98,000 = USD 9,800 from that shipment.
Letter of Credit Requirement
A letter of credit is a document of credit where financing the trade is undertaken by a bank. With a Letter of Credit, the bank guarantees payment of the transported goods but holds the bill of lading as a lien for payment from the importer.
Therefore, the bank can dictate the terms of the bill of lading, of course with consideration of the arrangement required by the importer and exporter too.
Should the terms of the letter of credit require a bill of lading to be arranged under freight prepaid or freight collect terms, the seller has to prepare a booking with the carrier in accordance with the document requirements of the bank.
ADDITIONAL READING: To Order Bill of Lading
This concludes the post where we explain more about the freight terms, Freight Prepaid and Freight Collect.
The ocean carrier provides this term for the seller and importer as an additional option for them to choose.
Stay tuned for more information about logistics and freight preparation. We do welcome any questions you wish to ask us, do let us a comment below if you have any questions!