As part of the freight transportation process, businesses must comprehensively understand the various payment terms that may arise during the negotiation phase. Additionally, there is a need also to acknowledge the extent of their influence on the financial outcome of every supply chain transaction.
Within the logistics industry, two of the most prevalent yet frequently misconstrued payment terminologies are “freight collect” and “freight prepaid.” And while these terms are widespread in the logistics sector, the confusion surrounding them has resulted in a substantial degree of perplexity and even animosity among those involved in the accounting aspect of freight transportation.
A comprehensive understanding of these terms can be immensely beneficial in determining the most helpful course of action that will enable businesses to optimize their profits. It’s also relevant in maintaining amicable business relationships and mitigating potential complications that could arise from an organization’s logistics process. As such, this article delves into the freight collect vs. freight prepaid argument, highlighting the circumstances where each would be beneficial.
What Is Freight Collect
“Freight collect” is a widely adopted payment method frequently utilized by carriers who deal with large volumes of goods or dispatch shipments to diverse locations, especially across various states and nations. This form of payment enhances cash flow efficiency and provides greater autonomy over shipping schedules, making it a popular choice within the industry. But how exactly does ‘freight collect’ work?
Under this payment agreement, shipping rates are invoiced to the freight recipient or the consignee rather than the party responsible for sending the cargo. The individual who takes possession of the goods upon delivery takes responsibility for settling the expense incurred during the transit.
Before sending freight, the shipper will negotiate with the consignee to determine the terms of payment, which they will document in the shipping paperwork, purchase order, or shipping contract. The “freight collect” method is called “Collect upon Arrival,” which explicitly implies that shipping and additional charges are the consignee’s responsibility.
Benefits And Downsides Of Freight Collect
For several reasons, the “freight collect” payment method is an ideal and prevalent payment arrangement in the logistics industry. For one, it is a straightforward process, eliminating the need for coordination of additional payments, especially in the case of ancillary charges. The freight collect payment approach ensures all supplementary charges are automatically billed to the consignee, which facilitates both parties to evade the complex scenario of owing or being owed.
The “freight collect” method also fosters a flexible payment method. It separates the expenses incurred during freight transportation from the actual cost of the goods. Also, it distributes the payment dates, offering businesses greater leeway in cash flow management. Ultimately, this approach enables companies to manage finances more easily by alleviating any financial burden associated with full upfront payment.
However, the process also comes with a significant downside. The success of the “freight collect” method depends on mutual agreement between the sender and recipient. This is because shippers send freight without total assurance of the consignee fulfilling their obligation of settling the delivery charges. As a result, the shipper is vulnerable to paying additional expenses if the consignee declines to pay.
What Is Freight Prepaid
On the other hand, “freight prepaid” features a process that opposes the freight collect payment method. In this scenario, the total cost of shipping is borne by the shipper rather than the consignee, with other additional expenses associated with freight transportation incorporated into the price of the goods.
Under this agreement, shippers factor the shipping expenses into the purchase price of the merchandise. The recipient of the goods is not required to pay additional fees upon delivery. In summary, the shipper is accountable for any supplementary, incidental costs that may arise during the shipping process.
Benefits And Downsides Of Freight Prepaid
A significant advantage to “freight prepaid” payment is its relatively upfront payment method and how well it builds client trust. The “freight prepaid” payment approach safeguards the interests of shippers when commencing a business relationship with consignees. This method ensures that a considerable portion of the transport rate is settled upfront before the goods are shipped.
Additionally, shippers maintain legal ownership of the goods while they are in transit and only transfer ownership following delivery. This offers several benefits to parties transporting fragile, specialized goods requiring customized delivery services. Shippers can maintain control over the freight for the entire journey duration, thus, minimizing the risks of damage, loss, or theft during the shipping process.
Shippers must deal with cash flow issues under the “freight prepaid” payment agreement. Freight prepaid agreements are not always final, as extra costs can still be incurred when the shipment is in transit. This can result in the shipper bearing the loss or the consignee covering additional charges. Whichever the case, there will likely be a delay in payment, resulting in cash flow issues for a business.
Which Is Best
Both strategies offer advantages and downsides in specific scenarios. As such, deciding which is best depends on how well they suit a particular situation and the type of business in question.
In most cases, “freight collect” provides an ideal solution for businesses looking to coordinate deliveries that involve extra fees or require delayed payments for organizational or financial reasons. For this reason, “freight collect” offers greater flexibility and cash flow management by separating the cost of goods from the shipping rate.
However, this method does require a high degree of trust between the shipper and the consignee. This is because the shipper assumes the risk of non-payment by the consignee. Despite this risk, the “freight collect” method perfectly balances a shipper’s need for an upfront payment and the consignee’s desire to spread out the logistics financial burden, especially for complex shipments.
On the other hand, freight prepaid is a suitable solution for shipments that are unlikely to incur additional charges, allowing for more straightforward payment coordination through a single transaction. This payment method is ideal for low-volume shippers or those yet to establish a strong relationship with the consignee.
By including the cost of shipping in the freight’s purchase price, freight prepaid provides a sense of security to the shipper and reduces the risk of having to bear additional expenses, such as storage and return fees. Furthermore, this method can also benefit the transportation of fragile and customized goods, where insurance policies only cover the shipper’s ownership of goods during transit.
Conclusion
To some extent, shippers and consignees view freight prepaid and “freight collect” as straightforward business processes. But in reality, they are more complex than they appear, as they involve more than just deciding who pays for what shipment and the payment process.
