Freight prepaid vs freight collect: What's best for you?

When it comes to international shipping, knowing the logistics and financial details is paramount. These include packaging, insurance, freight charges, duties, tariffs, and the list goes on. 

This is relatively simpler for bigger companies, which have specialized teams for managing each component.

However, SMBs responsible for around 98% of the exports in Europe, need to understand these aspects better to run a profitable business. 

One key element is figuring out who pays for the shipping costs. That's where understanding freight prepaid vs. freight collect comes in handy.

By clarifying these terms, you can ensure smoother transactions and avoid any mix-ups in your shipping processes. 

What is freight prepaid?

Freight prepaid means the sender pays for shipping costs or any other costs incurred while shipping upfront.

This gives the sender more control since they know exactly how much shipping will cost before the goods leave their facility.

How does it work?

With freight prepaid, the sender provides a Bill of Lading (BOL) to the carrier before shipping the goods.

The BOL is a legal document that includes all the shipment details like destination, contents, and weight. 

Once the payment is made and the documents are complete, the carrier takes the goods and starts the delivery process.

Remember, a freight bill is different from a BOL—the freight bill is like an invoice showing all the charges and fees for the shipment.

Pros and cons of freight prepaid

Pros of freight prepaid

1. Simplicity: Freight prepaid makes things easier for both the sender and the receiver. Since the sender pays upfront, the receiver doesn't have to worry about any shipping payments, making the whole process smoother.
2. Risk mitigation: By paying upfront, the sender doesn't have to worry about the receiver not paying the shipping charges later, reducing the risk of payment issues.
3. Improved customer service: Offering freight prepaid can be a nice perk for customers, as it eliminates the hassle of dealing with shipping payments.
4. Flexible shipping options: The sender can choose the best shipping method, carrier, and service level, giving them more control over cost, speed, and reliability.

Cons of freight prepaid

1. Higher upfront costs: The sender has to pay all shipping costs upfront, which can be tough on cash flow, especially for businesses with tight budgets or large shipping volumes.
2. Limited control for receiver: The receiver might have less say in the shipping process, including the choice of carrier and method.
3. Risk of disputes: While it reduces non-payment risks, there can still be disputes if the actual shipping costs end up being higher than expected.
4. Complexity in international shipments: Freight prepaid can be more complicated for international shipments due to customs duties, taxes, and other regulations.

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What Is freight collect?

Freight collect is a shipping payment method in which the receiver pays all the shipping costs directly to the carrier.

This means the sender doesn't have to cover the shipping costs upfront. Instead, they send the goods, and the receiver pays the shipping fees upon delivery.

Just a heads-up: freight collect doesn't mean free shipping—the receiver still has to be ready to pay all the shipping charges.

How does it work?

When you choose freight collect, the sender marks "freight collect" or "FOB origin freight collect" as the payment option when booking the shipment.

This ensures that all delivery fees and shipping costs are billed directly to the receiver by the carrier.

These costs include transportation fees, fuel surcharges, and any types of tariffs, duties or taxes. The carrier then invoices the sender for these costs.

Freight collect is popular in international shipping because it simplifies the payment process for the receiver.

Pros and cons of freight collect

Pros of freight collect

1. Cost control: The receiver has more control over shipping costs since they pay upon receipt. If they have good rates with carriers or prefer using their own shipping provider, freight collect can be a great option.
2. Cash flow: For the sender, it improves cash flow because they don't have to pay for shipping upfront. They can invoice the receiver for the freight charges separately.
3. Flexibility: The receiver can choose the shipping method and carrier, which is helpful if they have specific preferences or requirements.

Cons of freight collect

1. Risk of non-payment: The receiver might refuse to pay the shipping charges upon delivery, leading to disputes and possible legal issues. This is riskier when dealing with new or unreliable customers.
2. Administrative burden: Handling freight collect shipments involves extra administrative work for both the sender and receiver, like tracking charges, issuing separate invoices, and reconciling payments. This can add to the workload, especially for businesses with many shipments.
3. Limited shipping options: Freight collect might limit shipping options compared to prepaid shipping, possibly leading to longer delivery times or higher costs for faster shipping.
4. Negative impact on cash flow: Since payment is collected upon delivery, there can be delays in receiving payment, which might affect the sender's cashflow and overall business operations.

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Want to protect your business from trade risks? Learn how to mitigate them with effective international trade strategies. 

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Freight prepaid vs Freight collect

By now, you must’ve understood the basic difference between freight prepaid and freight collect. Simple right? 

But let’s not overlook the financial implications of freight prepaid vs freight collect.

To help you understand the differences, here's a handy comparison:

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Which one is right for you?

Still unsure whether to choose freight collect or freight prepaid?

Let's examine an example of freight prepaid vs freight collect to see which option better suits your business.

Freight collect example

Imagine a tech startup in Country A orders electronic components from a supplier in Country B.

If they choose freight collect, the supplier ships the components, and the startup pays the shipping fees directly to the carrier upon arrival.

This method is flexible but requires trust since the startup assumes financial risk if issues arise.

Freight prepaid example

Conversely, with freight prepaid, the supplier covers the shipping costs upfront, including them in the total price.

When the components arrive, the startup has no additional shipping fees to pay. This method is simpler and ideal for new business relationships or smaller shipments.

Struggling with managing freight costs? Here’s the solution

Freight costs impacts a business's budget before any revenue is generated.

These expenses hit your budget before you even start making a profit, which is particularly challenging for small international merchants. 

The problem is, while bigger firms often have resources to absorb these expenses more easily, SMBs can find them prohibitive. This is exactly where Stenn comes in. 

We have innovative funding options, like revenue-based and invoice financing, to help you access the capital needed to maximize growth.

Export Factoring lets you convert outstanding invoices into cash, boosting your growth.

Don't let a shortage of operating capital limit your growth. Elevate your financing strategy with Stenn and unlock the hidden potential in your balance sheet.

Applying is quick and simple—get started now!