Freight Prepaid vs Freight Collect: Who Pays and When
Freight prepaid vs freight collect explained: who pays the carrier, how each matches Incoterms 2020, the bill of lading notation and LC rules.
What is the difference between freight prepaid and freight collect?
Freight prepaid means the shipper pays the carrier at origin, and the bill of lading is marked "freight prepaid". Freight collect means the consignee pays at destination before the carrier releases the cargo. Which one applies follows the Incoterms 2020 rule in the sales contract: C and D terms are prepaid, E and F terms are collect.
At a glance
| Point | Freight prepaid | Freight collect |
|---|---|---|
| Who pays the carrier | Shipper (seller) | Consignee (buyer) |
| Where it is paid | Origin, before B/L release | Destination, before cargo release |
| Typical Incoterms 2020 | CFR, CIF, CPT, CIP, DAP, DPU, DDP | EXW, FCA, FAS, FOB |
| Who books the carrier | Seller or seller's forwarder | Buyer's nominated forwarder |
| B/L or AWB notation | "Freight prepaid" | "Freight collect" or "freight payable at destination" |
| Main risk | Seller finances freight until paid by buyer | Cargo held at destination if freight is unpaid |
How it ties to Incoterms 2020
Incoterms do not use the words prepaid or collect, but they decide who contracts for main carriage. Under CFR, CIF, CPT and CIP the seller must contract and pay for carriage to the named destination, so the seller pays the freight and the document shows freight prepaid. Under FOB, FCA, FAS and EXW the buyer arranges main carriage, so freight is normally paid by the buyer, either at destination (collect) or at origin by the buyer's forwarder.
Worked example
A seller ships 20 tonnes of goods from Mumbai to Rotterdam. Sea freight is USD 1,800 per container, plus USD 250 origin charges and EUR 320 destination charges.
- CIF Rotterdam: the seller pays the USD 1,800 freight and USD 250 origin charges and builds them into the price. The B/L reads "freight prepaid". The buyer pays the EUR 320 destination charges.
- FOB Nhava Sheva: the seller pays only the USD 250 origin charges. The B/L reads "freight collect", and the buyer pays USD 1,800 plus EUR 320 before the container is released in Rotterdam.
Letters of credit and the freight notation
If the credit (MT700 field 46A) asks for a bill of lading "marked freight prepaid", the document presented must say so. A freight collect B/L under a CIF or CFR credit is one of the routine reasons banks refuse documents. UCP 600 Article 26(c) also allows a transport document to mention charges additional to the freight, such as loading or stowage costs. Check the notation against the credit before the carrier issues the original B/L, because changing it later means a corrected set from the carrier.
Common mistakes
- Mismatch with the Incoterm. A CIF sale with a freight collect B/L means the buyer is asked to pay freight it already paid in the price.
- Forgetting destination charges. Freight prepaid covers the ocean leg only. Terminal handling, delivery order and import charges at destination are usually still the consignee's cost.
- Ignoring the release deadline. On collect shipments, late payment means the cargo waits at the port while free time runs out.
Frequently asked questions
What is the difference between freight prepaid and freight collect?#
Freight prepaid means the shipper pays the ocean or air freight to the carrier at origin, usually before the bill of lading is released. Freight collect means the consignee pays the freight at destination, and the carrier will not release the cargo until it is paid. The notation appears on the bill of lading or air waybill.
Which Incoterms use freight prepaid?#
C-terms (CFR, CIF, CPT, CIP) and D-terms (DAP, DPU, DDP) put the main carriage contract on the seller, so the transport document is normally marked freight prepaid. E and F terms (EXW, FCA, FAS, FOB) leave main carriage to the buyer, so the document is normally marked freight collect.
What if a letter of credit requires freight prepaid but the B/L says freight collect?#
That is a discrepancy. When the credit calls for a bill of lading marked freight prepaid, the document must show it. A freight collect notation does not comply, and the bank can refuse the presentation. Check field 46A of the MT700 before the carrier issues the B/L.
Can freight collect shipments be stopped at destination?#
Yes. The carrier has a lien on the cargo for unpaid freight. If the consignee does not pay the collect freight and destination charges, the goods stay in the terminal and demurrage and detention start once free time runs out.
Is freight prepaid cheaper than freight collect?#
Not automatically. The rate depends on who has the better contract with the carrier or forwarder. Sellers with volume contracts often get lower rates, which favours prepaid; large importers with their own nominated forwarder often get better rates on collect. Some carriers charge a small collect fee or a currency adjustment on collect freight.