Freight Prepaid vs Freight Collect

What it does

The freight prepaid or collect distinction concerns how and when freight is paid in relation to the bill of lading. A freight prepaid bill states that freight has been paid and allows the receiver to take the cargo at destination without paying freight to the carrier, whereas a freight collect bill leaves the freight payable at the discharge end, usually before the cargo is released.

The choice flows from the underlying charter and sale terms and affects the owner's security and the documentary chain. Under a prepaid arrangement the owner looks to the shipper or charterer for freight before or around shipment; under a collect arrangement it looks to the receiver at destination and typically retains a hold over the cargo until paid. The clause is read with the freight-payment and lien provisions that set the timing and security.

Commercial effect

The distinction allocates payment risk and shapes the documents the trade relies on. Freight prepaid bills are commonly required where the cargo is sold on terms under which the seller pays freight, and they let the goods move smoothly through banks and receivers without freight questions at the far end. Freight collect keeps payment due at destination, which suits other sale structures but leaves the owner relying on collecting at discharge.

For the owner the difference is largely about when and from whom it gets paid and how secure that is. A prepaid bill issued before freight is actually received can expose the owner to having released its security, while a collect arrangement preserves the leverage of withholding cargo until paid. The mechanics therefore interact closely with the lien and with the owner's documentary practice.

Owner's perspective

The owner wants to avoid issuing a freight prepaid bill of lading before it has actually received the freight, because doing so represents to receivers that freight is paid and undermines its ability to withhold the cargo as security. Where freight is prepaid, it wants payment in hand, or reliable arrangements for it, before the prepaid bill is released into the chain.

Under a collect arrangement the owner relies on its lien and on the practical ability to hold the cargo at discharge until freight is paid, so it wants the collect terms and the lien aligned. In either case it wants the documentation to match the freight position accurately, since a mismatch between what the bill says about freight and what has actually been paid is a direct risk to its revenue.

Charterer's perspective

The charterer's preference is driven by its sale and financing arrangements: where its buyers expect freight prepaid bills, it needs the charter to support issuing them, which usually means paying or arranging freight around shipment. It weighs the cash-flow cost of prepayment against the commercial necessity of providing prepaid documents to its buyers and banks.

Where freight is collect, the charterer is concerned with how the obligation falls on receivers and with avoiding being caught for freight that its buyers were to pay at destination. It negotiates the prepaid-versus-collect terms together with the freight-payment and lien provisions so that the documentary and payment structure matches the sale contracts down the line and does not leave it exposed in the middle.

Negotiation points

• Whether bills of lading are to be issued freight prepaid or freight collect.
• The timing of freight payment relative to the release of prepaid bills.
• How a collect arrangement interacts with the owner's lien at the discharge port.
• Alignment of the freight terms with the underlying sale and financing arrangements.

Common variations

• Freight prepaid bills issued against payment of freight at or before shipment.
• Freight collect bills with freight payable at destination before cargo release.
• A clause forbidding release of prepaid bills until freight is actually received.
• A split arrangement reflecting an advance and a collect balance.