Freight Collect vs Prepaid: Who Pays the Ocean Freight?

Freight collect means the consignee (usually the importer) pays the carrier for the ocean freight, while freight prepaid means the shipper (usually the exporter) pays. The choice is marked on the bill of lading and tells the carrier whom to invoice. It should line up with your Incoterms, but it does not decide when risk passes.

Key takeaways

• Freight collect bills the consignee; freight prepaid bills the shipper.
• When the buyer arranges main carriage under Incoterms, collect is typical; when the seller pays the main freight, prepaid is typical.
• A mismatch between the B/L marking and the actual payer can delay cargo release or create extra charges.

What do freight collect and freight prepaid mean?

Freight collect means the consignee pays the freight to the carrier at destination; freight prepaid means the shipper pays it. Both are billing instructions to the carrier and do not transfer ownership of the goods or set the point at which risk passes.

Under collect terms the shipper loads the goods but the freight invoice goes to the receiver. Under prepaid terms the carrier invoices the shipper. Risk and cost allocation between the parties is settled by the Incoterms rule and the contract of sale.

How do they relate to Incoterms 2020?

Under EXW, FCA, FAS or FOB, where the buyer contracts for and pays the main carriage, freight collect is the normal marking; under CFR, CIF, CPT, CIP, DAP, DPU or DDP, where the seller pays the main freight, freight prepaid is usual. Incoterms divide obligations between seller and buyer, while collect and prepaid are payment instructions to the carrier, so the two should stay aligned. Under CFR the seller pays the freight but the buyer still insures, so send a shipping advice as soon as the goods are loaded.

Even under FOB, the parties sometimes agree that the seller books and prepays the freight, so the marking should follow the actual agreement. The cost split for each rule is set out in the ICC Incoterms 2020 rules, and our Incoterms 2020 summary covers all eleven.

How is the term shown on the bill of lading?

The bill of lading normally carries the words “Freight Prepaid” or “Freight Collect.” That marking tells the carrier which party to bill, so it must match the commercial agreement.

If the marking is wrong, the carrier may need extra checks at destination or may hold the cargo until the freight is settled. In practice, compare the booking confirmation with the issued B/L and ask for a correction if they diverge. The difference between an original B/L and a sea waybill is explained in Bill of lading vs sea waybill.

Who pays in a worked example?

Under FOB Busan the buyer usually pays the ocean freight and the B/L shows Freight Collect; under CIF Los Angeles the seller pays it and the B/L shows Freight Prepaid. The figures below are an assumption for illustration.

Assume one 40-foot container moves from Busan to Los Angeles and the ocean freight is USD 2,500.

• FOB Busan + freight collect: the seller pays costs up to loading on board; the buyer pays the USD 2,500 ocean freight.
• CIF Los Angeles + freight prepaid: the seller pays the USD 2,500 ocean freight and the insurance required by the contract. Destination THC and customs charges still need a separate check.

Actual rates vary by carrier and route. For destination terminal charges, see What is THC?.

What are the most common mistakes?

The most frequent error is treating the Incoterm and the freight-payment marking as unrelated. Marking an FOB shipment as prepaid, or a CIF shipment as collect, without an agreement to do so can lead to freight disputes at destination.

Omitting the marking or forgetting a third-party billing arrangement in the booking causes the same problem. Cross-check the booking confirmation against the issued B/L and request an amendment as soon as they differ. Destination terminal handling charges are separate from the ocean freight, so agree who pays them. To separate freight from local charges on a quote, see Ocean Freight Quote: Which Line Items Should You Check?.

How do freight markings line up with each Incoterms rule? (SILENSEA table)

The table shows the usual pairing based on who pays the main carriage. The B/L marking ultimately follows the sale contract and the contract of carriage, so state any exception clearly in the SI.

Incoterms	Main carriage paid by	Usual B/L marking	Also check
EXW, FCA, FAS, FOB	Buyer	Freight collect	Buyer’s nominated forwarder, ability to pay at destination
CFR, CIF	Seller	Freight prepaid	Who insures (buyer under CFR), destination THC included or not
CPT, CIP	Seller	Freight prepaid	Delivery point and when risk passes
DAP, DPU, DDP	Seller	Freight prepaid	Destination charges and import clearance

What if the buyer does not pay collect freight? (made-up case)

This is an assumption. On an FOB sale the B/L is issued freight collect and the buyer does not pay at destination. The carrier can hold the cargo until freight is paid, and storage charges build up. If the seller has not been paid either, negotiations drag on while the goods sit. With a first-time buyer it is safer to get the buyer’s forwarder contact and confirmation of freight payment before loading.

FAQ

Is FOB freight collect or prepaid?

It is normally freight collect. Under Incoterms 2020 FOB the buyer contracts for and pays the ocean freight. The seller still covers costs up to loading, so keep pre-shipment costs separate from the main freight.

Is CIF always prepaid?

Usually, yes. Under CIF the seller pays the ocean freight to the destination port, so the bill of lading is normally marked Freight Prepaid. The seller also arranges the insurance, but destination charges depend on a separate agreement. As an exception, the parties can agree to mark a CIF bill of lading collect.

What happens if the marking is wrong?

The carrier may invoice the wrong party or hold the cargo until the freight is settled. Contact the forwarder or carrier at once for a correction and get it confirmed in writing.

Are freight collect and prepaid the same as Incoterms?

No. Incoterms allocate risk and cost between buyer and seller, while freight collect and prepaid only identify the party the carrier will bill. A mismatch between the two creates practical problems.

Sources

• ICC, Incoterms® 2020
• Related posts: Incoterms 2020 summary, Bill of lading vs sea waybill, What is THC?