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 1000 USD to a buyer. If it is a case of Freight Collect, the freight on the shipment (say 50 USD) will be borne by the buyer. In the exporter’s books, the transaction will appear as a sale of 1050 USD 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 USD as well as the freight charge of 50 USD So, the total payment made (or to be made) will be 1050 USD for the buyer.
The scenario will, of course, be the reverse in case of a Freight Prepaid transaction. Here, the seller will book 1000 USD as sales and account receivable but will also book an expense of 50 USD for the freight charges. Thus, the net proceeds of the exporter will be 950 USD. The buyer, on the other hand, will simply book the purchase cost of 1000 USD 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
- Letter of Undertaking (LUT) in GST For Exporters
- How to claim GST Refund on exports?
- What is the difference between BAF and CAF?
- What does CAF mean in Shipping?
- What does BAF mean in Shipping?
