THE REVIEW OF THE TWO MAIN CATEGORIES OF INCOTERMS
Introduction
In pursuit of better understanding the list of incoterms or to some-up your liability under various incoterms, it is important as a Trader to understand that there are essentially two main categories that each incoterm falls under, and they are namely: Freight collect and Freight Prepaid. You may be asking yourself what these concepts are and how do they fit into the eleven main set of incoterms?
Well, these terms are equally as critical, as the individual incoterms themselves. In our previous “Global Trade” blog, we highlighted that incoterms agreed upon between contracting parties, namely the shipper and the importer, are the guiding map, that all Logistics and Shipping Professionals, Carriers and Freight Forwarders, like SmooLink Forwarding (Pty) Ltd, have to abide by.
The Terms collectively dictate the actions that shipping professionals ultimately take, in shipping and delivering the consignment from the Shipper to the Importer.
Freight prepaid and Freight collect in particular, have to do with money and they dictate the movement thereof, or more specifically, when the payment can be made or received between contracting parties, such as: from between shipper and importer; between Freight Forwarders, and to shipping lines.
So, what exactly do these terms mean?
Freight, in this case, means the cost of international shipping, which may be by Sea or Air.
What Freight Prepaid term means therefore, is that it informs Supply Chain Professionals such as Carriers (i.e Shipping lines and Freight Forwarders) that payment of freight charges is payable by the Shipper, before the contract of carriage is set in motion. This way, the Shipper or Freight Forwarder on behalf of the Shipper, must pay the Freight charges, prior to shipping.
Freight Collect on the other hand, means that it is expected by Carriers (i.e Shipping lines and Freight Forwarders) that payment of freight charges will be payable by Importer (or their representative Freight Forwarder) upon arrival of vessel at port of destination. The Importer or their Forwarding Agent therefore, will have to settle the charges, before shipment can be released to them.
Which incoterms fall under Freight Prepaid and which are classified under Freight Collect?
Below is an illustration of the Terms and the category under which they fall, as well as the Transport mode applicable to each:
Conclusion
The main difference between Freight Prepaid and Freight Collect is the time upon which payment is made and every Shipper and Importer, as well as their respective Freight Forwarding Agents like SmooLink Forwarding (Pty) Ltd, needs to be familiar with these main categories and understand them, since they are the foundation of international shipping transactions, and no Shipping professional can deviate from them.
For example, under freight collect terms, it cannot be expected that payment be made by the party to which the freight charges are allocated, before international shipping has taken place or vessel has arrived at port of destination. On a shipping line invoice therefore, freight pre-paid and freight collect charges are found and are allocated to assigned payers on prepaid and collect basis accordingly.
Thus in a nutshell, Freight Prepaid and Freight Collect dictate whether as a shipper and your Freight Forwarding representative, pay for international shipping fees before shipping, under prepaid terms, or the importer and their Freight Forwarder pay for international shipping fees upon vessel arrival at port of destination, under collect terms.
For a brief overview and explanation of the above incoterms, click on links below: