Freight Management

Ultimate Guide to Freight Collect Payment Terms

by Matt Corby, 25 March 2022

As a freight manager or delivery driver, it pays to be aware of freight collect and other freight payment terms so you can make the best decision for your business.

The understanding will help you know what to do when a shipment has been delivered and when payment is due, helping you to reduce conflicts with customers and the accounts receivable departments. Read on to learn more about freight collect and why it could be a good choice for your business. 

What is Freight Collect? 

The term ‘freight collect’ means that the freight charges are billed to the consignee or the person receiving the shipment. The consignor, or the person shipping the goods, is not responsible for paying the freight charges. Instead, payment terms are negotiated between the two companies and reflected in the purchase order or shipping document.

The opposite of freight collect is freight pre-paid. In this payment term, the consignor is responsible for freight charges, and the costs are included in the price of the goods.

Typically, freight collect can also benefit shippers by controlling their shipping schedule and improving cash flow as payments are received after goods delivery instead of before.

The biggest lovers of freight collect are often large volume businesses and shipments to different states or countries.

What are the Key Freight Terms?

The language surrounding freight can be confusing, so let’s stop for a sec and go through a few of the key terms you need to know to understand what’s going on. 

  • Terms of Sale 

Terms of sale are essential because they indicate the relationship between your company and its customer. The terms of sale explain how the business is conducted, including payment terms, returns policies, warranties, liability limits, shipping costs, and order delivery dates. Terms of sales should be included in contracts with your customers or in your invoice forms if you don't have contracts. The terms detail each party's obligations.

  • FOB

FOB means the title of goods passes to the buyer when the goods are loaded on the vehicle. The buyer is then responsible for all costs and risks associated with the shipment until it arrives at its final destination. Freight prepaid is almost similar to FOB, except the buyer pays the freight charges before the goods shipment.

Who Benefits From Freight Collect?  

Freight collect provides more benefits to both parties involved in a shipment, by allowing increased reliability on cash flow. The agreements also enhance better business relationships between involved parties. They may negate the need for invoices until after delivery.

It can also be advantageous for shippers to use freight collect when payments are delayed or incur additional fees for processing and transporting the shipment.

Freight collect can also work well for large volume businesses involved in frequent transactions with accounts that maintain good standing with the shipper. 

To determine if a shipment requires freight collect payment terms, one would need to check with their specific company's policies or contact their sales representative. However, freight collect is typically the appropriate payment term when:

  • Shipping to another state 

Freight collection is appropriate when the length of time between consignor and consignee is vast, making it difficult or costly to track goods. For example, when making shipments between states or countries.

  • The Shipment will Incur Additional Costs

The shipment will likely incur additional fees to process or transport. These include oversized loads requiring special handling or deliveries to a remote location.

  • The Consignee Has an Established Account with the Shipper 

A freight collect payment term is often the best option when both parties have an established relationship. It means a long history of successful business transactions between the companies.

It's also applicable when the consignee has a good credit standing and account status with the shipper or has an established credit line.

Additionally, it's applicable when the volume of shipments made each year warrants working with accounts that are not pre-paid for freight charges.

Advantages

There are various advantages of freight collect. Let’s take a look: 

  • Minimal Hassle

The shipper and consignee avoid the hassle of billing and chasing payments. It can be a more cost-effective way for the shipper to do business, as it spreads the cost of freight charges over multiple shipments.

  • Better Control and Improved Business Relationships

The shipper maintains better control over their shipping schedule when payments are not due until after the goods have been delivered. The system establishes better business relationships between both parties as trust is established.

Disadvantages

Freight collect also isn’t going to be the best option for everyone. Here are some of the reasons why you might want to look into other payment terms: 

  • Trust Issues

There is a risk that the consignee may not pay the freight charges, resulting in the shipment being returned to the shipper or stored at the consignee's expense.

The shipper may need to take legal action to recover the freight charges if they are not paid.

  • Delayed Payments

The shipper must wait until the goods have been delivered before payment is received. Delayed payments can impact cash flow.

The shipment may be delayed if the consignee does not have the funds to pay for the freight charges at the time of delivery.

How Does Freight Collect Compare to Other Payment Terms?

Freight collect differs from other typical payment terms, such as cash-on-delivery (COD), where the consignee pays the freight charges at the time of delivery or pre-pay. Freight collect is a more flexible payment term. It does not require full payment from shippers until after delivery, making this payment term attractive for deliveries with additional fees.

Overall, freight collect is a payment term that should be considered by businesses who frequently engage in transactions and need to delay payments. It also balances the need for the shipper to have cash up-front with the consignee's desire to receive goods without immediately paying for them - creating a balance that many businesses find works well for them. 

There are risks associated with freight collect, but these can be mitigated by diligence in selecting customers worthy of this payment term. With the right due diligence, freight collect is an effective way of doing business with customers who have a good credit standing and account status.

Invest in the Right Logistics Tools 

Are you a freight manager looking for reliable logistics tools to make your job easier? Look no further than TransVirtual for all your freight collect needs. Our tools offer freight management and dispatch solutions that are easy to use and help you stay organised. We can help you with:

Contact us today for a free 30 days trial. We will walk with you to find appropriate solutions for your business.

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