Concept of Freight Prepaid and Freight Collect | Freight Prepaid vs Freight Collect

Freight prepaid and Freight collect are the terms associated to freight payment.

Whenever a trade happens few costs incurred, freight is the highest among all. Freight is the cost of the carriage levied by the carrier to seller/shipper/exporter or buyer/ consignee/ importer in order to transport the goods from one place to another.
Now who will pay the freight (including other shipping line charges)? Seller or buyer?
Well, here comes the concept of "Freight prepaid" and "Freight collect".

Freight prepaid: If freight (including other shipping line charges) is paid to the carrier/shipping line (liner) at place of origin while issuing Bill of lading, this is known as "Freight prepaid".

Freight collect: If freight is paid to the carrier/shipping line (liner) at the place of destination while issuing delivery order, this is known as "Freight collect".

Again these terms "Freight prepaid" and "Freight collect" depends on the incoterms. As per the rules of incoterms, Freight prepaid is applicable for the incoterms CIF, CFR and DDU, and Freight collect is applicable for the incoterms Ex Works and FOB.

These were the simple definition of "Freight prepaid" and "Freight collect", now we will understand these two terms practically with examples.

Example of Freight prepaid:
Let us assume a contract under CFR incoterms got signed between a seller in Chennai, India and a buyer in Montreal, Canada for the trade of 5X20 feet containers of furnished granite slabs.

As the incoterm is CFR, seller needs to arrange warehousing, packing, primary transportation till port of discharge, freight and other shipping line charges, export custom clearance and other expenses in origin. Seller contacts freight forwarder or liner for container booking and books 5X20 feet containers.

So once goods are ready, seller informs the CHA, transporter and CFS provider at Chennai. Goods are sent to the CFS and the goods are stuffed into the containers, and the CHA starts the process of custom clearance, once custom officers issues Let export order, after completion of custom clearance containers are sent to the port/ terminal for port activities and loading into the vessel.

Once vessel departs shipper and their CHA start approaching various offices for post shipment documents and receive all required documents. Now Bill of lading needs to be received from the shipping line. Shipper approaches shipping line (or freight forwarder if involved) for Bill of lading (B/L), shipping line issues invoices for Ocean freight, Terminal handling charges(THC) and other local charges. Shipper has to pay to the shipping line as per the invoice, once all charges are paid shipping line issues Bill of lading.
As shipper/exporter paid the freight at origin and received the B/L, this is known as "Freight Prepaid", in this case "Freight Prepaid" is mentioned on B/L.

Once all documents are received, seller/shipper sends the documents to the buyer/consignee as per agreed payment term. Consignee at Montreal, Canada approaches shipping line's office at Montreal after receiving all original documents. Consignee submits one set of original B/L to the shipping line and pays destination THC charges and other destination charges and gets delivery order from the shipping line, they don’t pay the freight as it was already paid at origin and the same was mentioned on the B/L.

Example of Freight collect:
Let us consider same references, seller/shipper is from Chennai, India, buyer/consignee is from Montreal, Canada and the product is 5X20 feet containers of furnished granite slabs. This time the buyer request for the FOB price as they are getting the ocean freight comparatively lesser then what Indian seller has quoted. Seller and buyer negotiates and seal the deal, an FOB contract signed between both parties.

As the incoterm is FOB, buyer/consignee needs to arrange containers and pay the freight. Buyer contacts their freight forwarder for booking of 5X20' containers from Chennai, India to Montreal, Canada. Freight forwarder contact their counterpart in India and place booking based on cargo readiness date (given by the seller) and the booking copy shared to seller/shipper.

Shipper sends the booking copy to their CHA and arrange trucks, load the goods on the trucks and send to the CFS. CHA pick up the containers (5X40') from the mentioned empty yard in the booking copy. CHA also arranges necessary permissions from customs and stuff the goods into the containers and co-ordinates with custom officers for the clearance. After completion of clearance, containers are sent to the port/terminal. Remaining documentation process completed at the port/terminal and the containers are sent the loading point. Once vessel arrives, the containers are loaded into vessel.

Once vessel departs, CHA starts collecting post shipment documents. Shipper contacts the shipping line for Bill of lading (B/L). After finalizing the draft B/L, shipping line issues their invoice for Terminal handling charges(THC), Documentation charges and other local charges. Once shipper pays the charges, shipping line issues the original Bill of lading.
So in this case shipping line only issued invoice for THC, Documentation charges or B/L issuance charges, they have not issued invoice for the Ocean freight because the containers were arranged by the buyer and the buyer will pay the freight at destination.

Once all documents are received shipper/seller sends the documents to the buyer at Montreal, Canada as per contracted payment terms.
Buyer receives the documents and approaches the office of shipping line at destination. Buyer submits original Bill of lading to the shipping line and requests them to issue the Delivery order (DO) so that they (buyer) can take delivery of the cargo after completion of custom formalities.

Shipping line checks the B/L in which "Freight collect" is mentioned and issues an invoice for THC, B/L charges, local charges (if any) and the Ocean freight. In this case (Freight collect) container booking party is buyer and buyer placed booking for containers, that is why buyer will pay the freight to the shipping after arrival of vessel at destination.

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