Doing business, especially with a party based in another country, can be pretty complicated. As we go deeper into international business, things can get confusing. Here, let us try and look into the term Freight Collect as used in international shipping.
Shipping Incoterms® (an acronym for International Commercial Terms) helps in the smooth conduct of business and transport of goods by defining the responsibilities of the seller and the buyer.
Published once every 10 years by the International Chamber of Commerce (ICC), Incoterms® play an important role in communication amongst the business and transport community.
It is recognized by government bodies and law agencies. The current version that is in use is the Incoterms® 2020 and it covers all modes of transport. It has a total of 11 rules of which 4 are specific to the transport of goods over water.
Typically, Freight Collect means that the responsibility for payment of freight charges is on the buyer or receiver of the goods. The amount towards freight charges falls due when the cargo arrives at its destination.
When the terms are Freight Collect the goods are handed over to the buyer or receiver by the ocean freight company against a valid Bill of Lading (BOL) after they have paid the freight charges in full.
Freight charges form a significant portion of the overall cost of goods. Freight rates depend on the mode of transportation used to move the goods from their origin to destination, the volume of cargo, type of goods, location, etc.
Freight Collect is a bit similar to the COD (Cash on Delivery) arrangement in online trading. In the case of COD, the customer pays for the item he has purchased when it is delivered to him by the courier.
In Freight Collect, only the freight is paid by the buyer at the time of delivery. There is a separate arrangement for payment towards the cost of goods or any other charges.
Is the term Freight Collect a part of Incoterms®? Well, not exactly but it is connected to many of the terms or rules mentioned in the Incoterms® 2020.
For example, when Incoterms® Ex-Works (EXW) and Free Carrier (FCA) are agreed upon between two parties, the freight is paid by the buyer.
Freight Collect and Freight Pre-paid
In Freight Collect the buyer or receiver of the goods pays for the freight. The goods are usually collected from the seller’s warehouse, as in the case of EXW. If terms are FCA, the seller delivers to the carrier at a pre-agreed place for its onward shipment to the buyer.
Generally, when the terms agreed are Freight Pre-paid freight charges are paid by the seller. The seller pays the freight charges and all other related charges that are incurred until the cargo arrives at the buyer’s premises.
It is useful to understand the two terms – FOB Origin and FOB Destination in this regard as it is quite often used in conjunction with the terms Freight Collect and Freight Prepaid.
When the terms of business are FOB Origin the seller has to deliver the goods to the carrier. The purchaser’s responsibility is to pay for the freight and all related costs till it reaches his premises or the required location. As soon as the goods are shipped from their origin, their ownership and responsibility shift to the purchaser.
FOB destination, on the other hand, is when the seller pays the freight charges for the transport of goods to the buyer’s desired location. In this case, the ownership of the goods remains with the seller when the goods are in transit. It shifts to the buyer only upon delivery of the goods.
Let us take a look at this very simple example of Freight Collect and Freight Pre-paid shipments.
Company A in Shanghai, China sells 2000 pairs of shoes to company B in Bremerhaven, Germany. The cost of the shoes is $70 for a pair. The freight charges for shipping this consignment by a 20’ GP container from Shanghai to Bremerhaven is $900.
When the terms agreed between companies A and B is Freight Collect, company A will charge company B a sum of $140,000 (cost of 2000 pairs of shoes @ $70 per pair). Company B will arrange for the freight of the cargo to Bremerhaven and pay the freight bill. It will also assume responsibility for the cargo as soon as it is delivered by the seller to the carrier.
When it is Freight Prepaid, company A will charge company B $140,900 (cost of shoes + cost of freight). The responsibility of the shipment, until it reaches company B’s location in Germany will be with company A.
Instances where freight is paid upfront by the seller, are in CIF (Cost Insurance and Freight) and CFR (Cost and Freight) Incoterms®. These two terms – CIF and CFR, are specific to the transport of goods over water.
How do Terms Such as Freight Collect and Freight Prepaid Help the Seller and Buyer?
As with all Incoterms®, these terms also help to specify who pays the freight charges. It removes any ambiguity between the buyer and seller and also helps to fix the liability of goods, on a specific party – normally the seller or buyer, during its different stages of transit.
When the terms mentioned in the trade agreement is Freight Collect, it is normally the buyer or receiver of the goods who pays the freight charges when it reaches its destination. In this case, the liability of the cargo is on the buyer when it is in transit.
On the other hand, when the terms mentioned is Freight Prepaid, the seller pays the freight charges and the liability of the goods is on him till it reaches its destination.
Incoterms® are recognized globally and in the event of any dispute between the parties, it helps law and enforcement authorities to pin the responsibility easily.
Which is Ideal – Freight Collect or Freight Prepaid?
A seller might prefer Freight Collect FOB Origin terms as any risk on the cargo during transit is upon the buyer. Here, the freight charges are also paid by the buyer.
A buyer might prefer Freight Prepaid FOB Destination terms where the freight charges are paid by the seller and any risk on the goods during its shipment is also borne by him.
FOB Origin Freight Prepaid requires the seller to pay the shipping cost of the goods. The buyer, while being responsible for the cargo, will also get the ownership of goods at their origin.
When the terms of trade are FOB Origin Freight Collect, the purchaser pays the freight charges and assumes full liability of the cargo right from its origin.
In FOB Destination Freight Prepaid, the freight charges are paid by the seller while under FOB Destination Freight Collect terms the buyer or receiver pays the freight charges upon receiving the goods at its destination.
You might also like to read:
- Freight Forwarding Process – Everything You Wanted to Know
- Freight Forwarder Vs Supply Chain Professional: What To Choose?
- What Are OEM and ODM In Shipping?
- What are Bonded Goods in Shipping?
- What is Full Truckload in Shipping?
Disclaimer: The authors’ views expressed in this article do not necessarily reflect the views of Marine Insight. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendations on any course of action to be followed by the reader.
Hari Menon is a Freelance writer with close to 20 years of professional experience in Logistics, Warehousing, Supply chain, and Contracts administration. An avid fitness freak, and bibliophile, he loves travelling too.