Incoterms® 2020 Guide

Understanding Prepaid vs. Collect in International Shipping

When shipping internationally, one of the most common questions is:

Is this shipment prepaid or collect?

The answer depends on the Incoterm used in your sales contract.

Incoterms® 2020 are globally recognized trade rules published by the International Chamber of Commerce. They define:

• Who pays for transportation

• Who arranges freight

• Who handles export and import clearance

• When risk transfers from seller to buyer

Selecting the correct Incoterm helps avoid confusion, delays, and unexpected charges.

What Does “Prepaid” vs. “Collect” Mean?

Prepaid Freight

The seller pays the main transportation cost.

The freight charges are included in the seller’s invoice to the buyer.

Common prepaid Incoterms include:

• CPT (Carriage Paid To)

• CIP (Carriage and Insurance Paid To)

• CFR (Cost and Freight)

• CIF (Cost, Insurance and Freight)

• DAP

• DDP

Collect Freight

The buyer pays the main transportation cost.

The buyer arranges or pays the carrier directly.

Common collect Incoterms include:

• EXW (Ex Works)

• FCA (Free Carrier)

• FAS (Free Alongside Ship)

• FOB (Free on Board)

Important: Cost vs. Risk Are Not the Same

One of the most misunderstood parts of Incoterms is that:

Who pays for freight is not always the same as who carries the risk.

Example:

Under CPT:

• Seller pays freight (prepaid)

• Risk transfers once cargo is handed to the carrier at origin

Under FOB:

• Seller loads cargo on vessel

• Risk transfers once onboard

• Buyer pays ocean freight (collect)

Understanding this distinction is critical to structuring international transactions properly.

The 11 Incoterms® 2020 at a Glance

Any Mode of Transport

• EXW – Ex Works

• FCA – Free Carrier

• CPT – Carriage Paid To

• CIP – Carriage and Insurance Paid To

• DAP – Delivered at Place

• DPU – Delivered at Place Unloaded

• DDP – Delivered Duty Paid

Sea and Inland Waterway Only

• FAS – Free Alongside Ship

• FOB – Free on Board

• CFR – Cost and Freight

• CIF – Cost, Insurance and Freight

Each term allocates cost and risk differently. The correct choice depends on your shipment structure, buyer relationship, and operational capabilities.

When Should You Choose Prepaid vs. Collect?

Prepaid terms are often used when:

• The seller has stronger freight buying power

• The seller wants control of carrier selection

• The buyer prefers simplified billing

Collect terms are often used when:

• The buyer has preferred carrier contracts

• The buyer controls logistics strategy

• The seller wants minimal shipping responsibility

Why Proper Incoterm Selection Matters

Incorrect use of Incoterms can lead to:

• Disputes over freight charges

• Delays at origin or destination

• Unexpected customs costs

• Confusion over insurance coverage

A clearly defined Incoterm protects both parties and ensures smoother execution.

Frequently Asked Questions

Is FOB prepaid or collect?
Typically collect. The buyer pays ocean freight, though the seller loads the goods onboard.

Is DDP prepaid?
Yes. The seller pays transportation and import duties.

Does prepaid mean risk stays with the seller?
No. Risk transfer is defined separately from cost responsibility.

Should I include the Incoterm on my invoice?
Yes. Always list the full term and version (e.g., FCA Chicago – Incoterms® 2020).

Disclaimer

This page is provided for informational purposes only. Incoterms® 2020 are published by the International Chamber of Commerce. Parties should consult official ICC publications and qualified legal counsel when drafting international contracts.

FREIGHT DIRECTORY assumes no responsibility for regulatory violations or operational decisions based on this content.