Freight prepaid

Freight prepaid - is a concept that we can more often find in air and sea shipments. It is an advance payment for the goods, which means that the seller is responsible for the freight charges. It is in close relationship with incoterms, which define the obligations of the parties regarding the transport of goods from seller (shipper) to receiver (buyer).

The Freight Definition

Freight means the goods or the products being transported by land, water or air. It also means the payment for the carriage of goods (or passengers) in air and sea shipments. Initially, (starting from the 17th century) the term used only in the context of maritime transportation. But now the term freight is used with new modes of transport like trains, cars, and airplanes. An important nuance: freight refers to the payment of only large quantities of goods that are transported over long distances.

The Incoterms

The incoterms (International Commercial Terms) are the world's standard term published by the International Chamber of Commerce (ICC) in 1936. "The incoterms 2010" constitute a set of 11 rules, which define the delivery method, the conditions of export and import and the risks and the costs of transactions between the seller and the buyer.

Incoterms related to Freight Prepaid:

• F.O.B. (Free On Board) Origin, Freight Prepaid: this term means that the seller maintains the responsibility for the cost of shipping, but the buyer takes ownership and assumes liability for goods at the time of carrier loaded.
• C.P.T. (Carriage Paid To): this term means that the seller is responsible for the cost of shipping and risks that related to transportation of goods to a carrier of the destination country.
• C.I.P. (Carriage and Insurance Paid): this term means that the shipper pays for the freight and the insurance that covers the risk of damage or loss to the goods delivered to the carrier at an agreed location.
• C.I.F. (Cost, Insurance and Freight) : this term means that the shipper is responsible for the freight and the costs of transportation to the port of destination and also contracts for insurance to deliver goods.
• C.F.R. (Cost and Freight): this term means that the seller pays for the freight and the costs of shipping to the named location. The risk is transferred to the receiver at the time of unloaded.
• F.O.B. (Free On Board) Destination, Freight Prepaid: this term means that the seller pays for the cost of shipping and takes responsibility for the transportation of goods.
• D.A.T. (Delivered at Terminal): this term means that the seller is responsible for the transportation costs of goods and unloading them in the indicated place.
• D.A.P. (Delivered at Place): this term means that the shipper takes responsibility for arranging delivery and for transportation of goods, ready for unloading in the indicated place of destination.
• D.D.P. (Delivered Duty Paid): this term means that the seller delivers the goods at an agreed location and pays all duties including import. But the seller is not responsible for unloading.

Examples of Freight prepaid

• Sea Shipping: In sea shipping, the seller pays for the freight charges up front, before the goods are shipped. This is useful for large shipments, as it allows the buyer to avoid paying large sums at the time of receiving the goods. This can also reduce the risk of the buyer not having the funds to pay for the freight charges.
• Air Shipping: In air shipping, the seller is responsible for paying the freight charges before the goods are shipped. This can be beneficial for the buyer, as they are not required to pay the freight charges up front. It also helps to reduce the risk of the buyer not having the funds to pay for the freight charges.
• Trucking: In trucking, the seller pays for the freight charges up front, before the goods are shipped. This allows the buyer to avoid paying large sums at the time of receiving the goods. It can also reduce the risk of the buyer not having the funds to pay for the freight charges.

Advantages of Freight prepaid

Freight prepaid is a common way of shipping goods, especially when it comes to air and sea shipments. It has several advantages, including:

• Reduced costs for the buyer, as the seller is taking care of all the freight charges.
• Improved cash flow for the seller, as the buyer pays upfront for the goods.
• Reduced paperwork for the seller, as all the costs are paid in advance.
• Increased efficiency, since the seller can focus on the shipment itself and not on the costs and paperwork.
• Improved customer service, since the buyer can be sure that their goods will arrive on time.

Limitations of Freight prepaid

Freight prepaid is a term used in air and sea shipments, which means that the seller is responsible for the freight charges. However, it has some limitations, including:

• The seller is only responsible for paying the freight charges, and is not responsible for any additional costs such as taxes, duties, customs fees, etc.
• The seller cannot be held liable for any delays in transit or any other problems that may occur during shipping.
• The seller must provide proof of shipping, such as a bill of lading or airway bill, to the buyer.
• The seller must also provide a copy of the commercial invoice to the buyer.
• The seller is responsible for ensuring that the goods are properly packaged and labeled before they are shipped.
• The seller is not responsible for any losses or damages that may occur during transit.

Other approaches related to Freight prepaid

• Freight collect - is an approach that requires the buyer to pay for the freight charges before or after the goods are delivered.
• Freight payable at destination - is a method where the seller is responsible for the freight costs until the goods arrive at the buyer's location.
• Freight payable at origin - is an arrangement in which the buyer is responsible for the costs incurred in transporting goods to the origin point, while the seller pays the cost of transportation from the origin point to the buyer's location.
• Third-party billing - is an arrangement where a third party is responsible for paying the freight costs.

In summary, freight prepaid is just one of the approaches for payment of freight costs in international trade. Other approaches include freight collect, freight payable at destination, freight payable at origin, and third-party billing. Each of these approaches has its own advantages and disadvantages depending on the situation.

Footnotes

Freight prepaid — recommended articles

Freight insurance — Shipping guarantee — Master bill of lading — Contract of affreightment — Letter Of Indemnity — Door to door service — Waybill — Free carrier (FCA) — Free On Board - FOB

References

• David A. Glass, (2012), Freight Forwarding and Multi Modal Transport Contracts Informa Law from Routledge, Abingdon.
• Incoterms® 2010, "International Chamber of Commerce" (2019).
• International Projects, Inc., (2010), Incoterms for Americans. "Seminar Notes" , Toledo.
• The Incoterms rules, (2019).
• The World Trade Press Illustrated Guide to Incoterms 2010, (2010),Incoterms 2010, "Professional Industry Report".

Author: Viktoryia Yunik