Freight Cost Definition: Everything You Need to Know
One freight cost definition is the amount you pay to transport goods from one place to another, whether by land, sea, or air.3 min read
One freight cost definition is the amount you pay to transport goods from one place to another, whether by land, sea, or air. Many United States businesses depend on the ability to buy and sell goods from companies in other countries. It is important, therefore, that businesses learn the different ways freight costs can be applied. They also need to know how freight is documented to minimize confusion.
There are a number of expense considerations that go into figuring the cost of shipping from the seller's location to the buyer's outlet. These include:
- Transportation to the departure location
- Loading onto the vessel
- Marine freight transport
- Transportation to the destination location
With the increased demand for freight shipping, more companies set their shipping prices by freight density rather than by weight. They do this because charging by weight limits the amount they can ship and is therefore more expensive, both in terms of money and space. The greater the freight density, the less space it occupies on the carrying vessel. This decreases the transportation costs for each pound shipped.
There are federal and state laws regulating freight costs. These are designed to protect consumers from being overcharged.
There are two important documents you receive from shippers or logistic companies when you ship goods: the freight bill and the bill of lading.
The freight bill is your invoice. You can use this to pay the bill and keep a record of it.
The bill of lading declares the type and quantity of goods you are shipping. It represents the agreement you have with the shipper to transport these items. The bill of lading shows the weight, value, and description of each item, along with shipping and delivery dates. If necessary, you can use bills of lading in a court of law.
You should store these and any other documents that relate to shipping costs for several years. By keeping these records, you are prepared in case future issues arise.
Types of Freight Charges
There are, broadly speaking, two ways to pay for the transportation of goods:
- Freight Pre-Paid: The consignor pays the freight and takes ownership of it until the consignee receives it and pays the invoice.
- Freight Collect: The consignee pays the freight and takes ownership of it when the carrier receives it.
The bill of lading can describe these charges in various ways:
- Consignee Collects: The consignee pays freight charges and takes care of customs and applicable tax or other forms.
- Prepay and Add: The consigner pays the freight, perhaps getting a better deal than the consignee might have gotten. The consigner then passes this cost on to the consignee.
- Third Party: A third party, usually a logistics company, handles payment of freight charges.
- Cash on Delivery (COD): Upon delivery, the consignee pays the carrier who then pays the consigner.
- Freight-on-Board, or Free-on-Board (FOB) Origin: At the consigner's dock, the consignee assumes responsibility for the freight and pays all costs.
- FOB Origin, Freight Prepaid: Same as above, except the consigner pays the freight charges.
- FOB Origin, Freight Prepaid and Charged Back: Same as above, only the consigner bills the consignee for the freight charges.
- FOB Destination: At the consignee's dock, the title for goods passes. The consigner takes care of freight charges.
- FOB Destination, Freight Collect: Same as above, only the consignee takes care of freight charges.
- FOB Destination, Freight Collect and Allowed: Same as above, except the consignee deducts the freight charges from the cosigner's invoice.
“Freight on Board” is not an indication of who owns the freight. It is an internationally-recognized legal term that says the consigner must transport the freight to the consignee on some kind of vessel.
It describes the point at which the consigner stops being responsible for the freight and the consignee must pay the shipping costs. In an ideal situation, the consigner pays to have the freight delivered to a stated destination. The consignee then covers the cost of transporting the freight from that location to the retail outlet.
The bill of lading states who owns the freight. The terms of sale indicates who is paying the freight costs.
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