Prepaid, collect or third party: which freight terms should we use?
Key Takeaways
- Freight terms answer three questions for every load: who chooses and books the carrier, who receives and pays the freight bill, and who deals with the carrier if something goes wrong.
- Prepaid means the shipper pays the carrier. Collect means the consignee pays. Third party means someone else pays, such as a customer's parent company, a freight payment service or a logistics provider.
- Prepaid and add is a billing choice, not a carrier term: the shipper pays the carrier, then adds the freight to the customer's invoice.
- The freight terms box on the bill of lading decides who the carrier bills. If the box is wrong, the invoice goes to the wrong party and payment stalls.
- Risk of loss is set by the sales contract, not by who pays the freight. Confirm it with your sales and legal teams instead of assuming the freight terms settle it.
- Wilson, by Cartage, is an AI logistics agent that books, documents and pays freight under the company's rules, and puts the agreed freight terms on every bill of lading it generates.
Which freight terms should we use for a shipment?
A sales rep closes an order with a new distributor. The customer's purchase order says "FOB origin, freight collect, use our carrier." The shipping team never sees the purchase order. They book their usual carrier, check "prepaid" on the bill of lading, and ship. Three weeks later the carrier invoice lands in accounts payable, the customer refuses to pay the freight line on the sales invoice, and nobody can agree on who owes what.
Use the freight terms that match who controls the carrier and who pays the bill: prepaid when your company books and pays, collect when the customer books and pays, third party when a different company pays, and prepaid and add when you book and pay but pass the cost to the customer. The right choice depends on the customer's preference, your carrier rates, how much control you need over delivery and how your sales contract assigns cost and risk.
Most shippers use more than one set of terms. A manufacturer might ship most orders prepaid, run large retail accounts on the customer's routing guide as collect or third party, and use prepaid and add for small accounts that want one invoice. The problem isn't having several terms. The problem is when the terms on the order, the bill of lading and the carrier booking don't match.
What the terms actually decide
Freight terms decide three practical things:
- Who books the carrier. On prepaid loads, the shipper usually picks the carrier and tenders the load. On collect and third-party loads, the customer often picks the carrier or tells the shipper which one to use.
- Who gets the freight invoice. The carrier bills the party named in the freight terms on the bill of lading.
- Who handles problems with the carrier. The party that books and pays usually manages delays, claims and disputes, because the carrier treats that party as its customer.
What the terms don't decide by themselves
Freight terms on a bill of lading tell the carrier who pays. They don't, on their own, settle who owns the goods in transit or who bears the loss if freight is damaged. Those questions are usually answered in the sales contract, purchase order terms or the company's standard terms of sale. Shipping terms such as "FOB origin" or "FOB destination" often appear in those documents, and companies use them differently. Confirm what your contracts say with your sales and legal teams before you rely on the freight terms to answer a risk question.
How do prepaid, collect, third party and prepaid and add work?
Each term is a different arrangement of who books, who pays and who manages the carrier. The table below shows the four common options side by side.
| Freight terms | Who usually books the carrier | Who the carrier bills | Who usually manages the carrier | Common use |
|---|---|---|---|---|
| Prepaid | Shipper | Shipper | Shipper | Standard outbound freight, delivered pricing, free freight offers |
| Prepaid and add | Shipper | Shipper, who then bills the customer | Shipper | Customers who want the shipper to arrange freight but pay for it |
| Collect | Customer, or shipper using the customer's carrier | Consignee | Customer | Customers with their own carrier rates or a routing guide |
| Third party | Customer or its logistics provider | A named third party | The third party or the customer | Large retailers, buying groups, freight payment services |
Prepaid
On a prepaid load, the shipper chooses the carrier, books the load, receives the invoice and pays it. The shipper may build freight into the product price, offer free freight above an order threshold, or charge a flat freight fee on the sales invoice. The shipper controls the carrier choice, pickup timing and service level, and owns the follow-up when something goes wrong. Prepaid works best when the shipper has good carrier rates, wants to control delivery, or sells on delivered pricing.
Prepaid and add
Prepaid and add is prepaid freight with a billing step added. The shipper books and pays the carrier as usual, then adds the freight charge to the customer's sales invoice. Some companies add the exact carrier cost. Others add a published freight rate or a handling fee. The carrier sees a normal prepaid load. The customer sees a freight line on the invoice. This works well for customers who don't want to manage carriers but accept paying for freight, and it lets the shipper keep control of pickups and delivery.
The weak point is timing. The final carrier cost may not be known when the sales invoice goes out, especially for LTL loads that can be re-weighed or re-classed. Decide in advance whether the customer pays the quoted rate, the final invoiced rate, or a fixed table, and write that into your terms of sale.
Collect
On a collect load, the consignee pays the carrier. The customer often has its own carrier agreement and its own rates, and may tell the shipper which carrier to use and how to schedule the pickup. The shipper's role is usually to have the freight ready, prepare the bill of lading with the right terms and load the truck. The carrier then bills the customer.
Collect works when the customer has better rates or wants control of inbound freight. It can be harder for the shipper, because the carrier's customer is the consignee, not the shipper. If the truck doesn't show, the shipper often has to call the customer, who then calls the carrier.
Third party
On a third-party load, the freight bill goes to a party that is neither the shipper nor the consignee. That might be the customer's corporate office, a freight payment company, a logistics provider or a buying group. The bill of lading names the third party and its billing address. Large retailers and distributors often use third-party billing so that all inbound freight bills flow to one place for payment and audit.
The most common failure is an incomplete billing address. If the bill of lading says "third party" but the billing box is blank or out of date, the carrier may bill the shipper instead, and the shipper then has to chase a credit or a rebill.
Customer-routed loads
"Customer-routed" describes who chooses the carrier, not who pays. Most customer-routed loads are collect or third party, but not all. A customer may ask the shipper to use a specific carrier and still accept freight prepaid and added. For the follow-up side of these loads, see customer-routed vs. company-booked loads.
How do freight terms show on the bill of lading?
The bill of lading has a freight charge terms section, and the carrier bills whichever party that section names. Getting it right on every load is the single most important step in managing freight terms.
The freight terms box
Most straight bills of lading used for domestic truck freight have a section for freight charge terms with options such as prepaid, collect and third party. When third party is checked, a separate "bill to" section should hold the third party's name and full address, and often an account number. Some customers also require their purchase order number or a vendor number on the bill of lading so their freight payment process can match the bill.
What else on the bill of lading needs to match
The freight terms box is only one part. The rest of the bill of lading should agree with it:
- Shipper and consignee names and addresses match the sales order.
- Carrier name and SCAC match the carrier actually picking up, especially on customer-routed loads where the customer chose the carrier.
- Customer reference numbers, such as purchase order and routing numbers, are present if the customer's routing guide asks for them.
- Third-party billing details are complete when third party is checked.
- Special instructions reflect any accessorials the customer agreed to pay.
For a wider look at what goes on the document and who checks it, see the bill of lading guide.
Where mismatches come from
Freight term errors rarely come from carelessness on the dock. They come from the freight terms living in one place and the bill of lading being made in another. The sales order may carry the terms, but the shipping team works from a pick ticket that doesn't. Or a customer changes from collect to prepaid and add, and the change reaches billing but not shipping. Or the bill of lading is copied from the last load to that customer, which used different terms.
How to fix the flow
Store the freight terms on the customer record and on each sales order, and make the bill of lading pull them from the order instead of being typed. When an order has terms that differ from the customer default, flag it for the shipping team. When a carrier invoice arrives, compare the billed party with the terms on the bill of lading before anyone pays it. That three-step loop catches most freight term mistakes before they cost money.
When does each freight term make sense?
Choose prepaid when you want control or have better rates, collect or third party when the customer has better rates or a routing guide, and prepaid and add when the customer wants convenience but should pay for freight. The decision is commercial as much as logistical, so sales, finance and logistics should agree on it.
Signs prepaid is the better choice
- Your carrier rates on the lane are as good as or better than the customer's.
- Delivery timing matters to the customer relationship and you want to control it.
- You sell on delivered pricing or offer free freight above an order size.
- You want one consistent process for booking, tracking and invoice checks.
- The customer has no carrier program and would struggle to arrange pickups.
Signs collect or third party is the better choice
- The customer has a carrier program with better rates on the lane.
- The customer has a routing guide and requires vendors to follow it.
- The customer wants all inbound freight consolidated under its own control.
- The load is a pickup the customer arranges itself, such as a will-call.
- Freight cost is a large share of the order value and the customer wants to manage it.
When prepaid and add fits
Prepaid and add fits customers who want you to handle freight but expect to pay for it, such as smaller distributors without carrier contracts. It also fits when you want control of delivery but don't want freight cost to reduce your margin. It works best when the customer accepts how the freight charge will be calculated before the first order ships.
When customer-routed loads make sense
Customer-routed loads make sense when the customer really does have better rates or needs inbound control, and when the customer's carrier can meet your dock's pickup windows. They make less sense when the customer's carrier misses pickups often, because the shipper pays for those misses in dock time, staging space and late shipments, without any control over the carrier. If a customer-routed account keeps causing missed pickups, raise it with the customer and propose a prepaid and add option.
Common mistakes
| Mistake | What happens | How to prevent it |
|---|---|---|
| Terms on the order but not on the bill of lading | The carrier bills the shipper for a collect load | Pull terms from the order into the bill of lading |
| Third party checked, billing address blank | The carrier bills the shipper by default | Store the third party's billing details on the customer record |
| Shipper books its own carrier on a customer-routed order | The customer refuses the freight charge | Flag routed orders at order entry |
| Prepaid and add with no agreed calculation | The customer disputes the freight line | Write the method into the terms of sale |
| Assuming freight terms settle risk of loss | Confusion when a claim is filed | Check the sales contract for risk and title terms |
| Terms changed by sales but not shared with shipping | Old terms keep appearing on documents | Send term changes to logistics and update the customer record |
What happens when freight is damaged
When freight arrives damaged or short, the party that booked and paid the carrier usually files the claim, because it has the relationship and the paperwork. On prepaid loads that is usually the shipper. On collect loads it is usually the customer. But who bears the loss depends on the contract, and the claim may need to be filed by the party who owns the goods. Federal law sets minimum time limits for cargo claims against motor carriers: carriers can't give shippers less than nine months to file a claim or less than two years to bring a lawsuit after a claim is denied. Check your carrier agreements and sales terms for the exact rules that apply.
A checklist for setting and checking freight terms
Run this checklist when a new customer is set up, when terms change and on every carrier invoice. It keeps sales, logistics and finance working from the same terms.
At customer setup
| Check | What to confirm | Who owns it |
|---|---|---|
| Default freight terms | Prepaid, prepaid and add, collect or third party | Sales, with finance |
| Carrier choice | Shipper's carrier, customer's carrier or routing guide | Sales and logistics |
| Third-party billing details | Full name, address and account number | Logistics |
| Freight charge method for prepaid and add | Quoted rate, final rate, table or flat fee | Finance |
| Risk and title terms | What the sales contract or purchase order terms say | Sales, with legal |
| Reference numbers | Purchase order, vendor and routing numbers required on the bill of lading | Logistics |
On each order
- Do the order's freight terms match the customer default? If not, has someone confirmed the change?
- If the order is customer-routed, has the customer named the carrier and approved the pickup time?
- Does the bill of lading show the same freight terms and, for third party, the full billing details?
- Does the carrier picking up match the carrier on the bill of lading?
On each carrier invoice
- Does the billed party match the freight terms on the bill of lading?
- If the load was collect or third party and the invoice came to you, has it been sent back to the carrier with the correct bill-to party?
- If the load was prepaid and add, does the freight line on the customer invoice match the agreed method?
- Does the invoice match the rate confirmation? See why invoice review starts with the rate confirmation.
Writing the terms down
Customers and carriers follow written instructions better than verbal ones. If you ship a lot of collect or third-party freight, or you want suppliers to ship to you on your terms, a short document that sets out carriers, freight terms and bill of lading requirements saves many calls. See how to write a routing guide for carriers and suppliers for a structure.
An example: one customer, three sets of terms
Consider a hypothetical industrial distributor buying from a manufacturer. Its large monthly stock orders ship collect on the distributor's own truckload carrier, because the distributor has a strong rate on that lane. Its smaller rush orders ship prepaid and add on the manufacturer's LTL carrier, because the distributor wants them fast and doesn't want to arrange them. Its drop shipments to end customers ship third party, billed to the distributor's freight payment service. All three are correct, but only if the order carries the right terms and the bill of lading pulls them every time. The manufacturer stores the default as collect, flags rush and drop ship orders at entry, and checks every carrier invoice for the billed party before paying.
How does Wilson, by Cartage, keep freight terms consistent from order to invoice?
Wilson, by Cartage, is an AI logistics agent that quotes, books, documents, tracks, audits and pays freight for manufacturers and distributors, using the freight terms set on each order. Traditional logistics software gives teams information. Wilson executes the work required to move shipments forward.
Wilson handles the steps where freight terms go wrong:
- At booking, Wilson works from the order. On prepaid and prepaid and add loads, it requests quotes from the company's approved carriers, compares them on total cost and negotiates toward the company's rate targets within approval limits. Rates outside the limits go to the logistics team. It books the chosen carrier with written acceptance and a rate confirmation.
- On customer-routed loads, Wilson can schedule the pickup with the customer's named carrier when that carrier is on the company's approved list, and keeps the load and its terms on the record so the team can follow it.
- On documents, Wilson generates the bill of lading, packing slips and pallet labels from the booked load, with the freight terms and third-party billing details from the order.
- In transit, Wilson tracks each load with the best source available for that carrier and handles exceptions such as a missed pickup or a delay: it contacts the carrier, tells the team and, if configured, tells the customer.
- At invoice time, Wilson requests and files the POD, then audits each carrier invoice against the rate confirmation and POD. It pays carriers from the Wilson Wallet under the company's rules. Payments above the approval limits or outside the rules wait for a person.
Every message, confirmation and change is kept in the shipment's change history, so when a customer disputes a freight charge, the terms, the bill of lading and the carrier's confirmation are all on the record. Wilson replaces the TMS for freight execution and connects to the company's ERP.
Wilson works with SAP, NetSuite, Microsoft Dynamics 365, Oracle, Infor, Epicor, Sage, Acumatica and other ERP environments, with the exact connection depending on the customer's data flow and scope.
Pricing
Wilson is free on Wilson's network: the shipper pays the freight rate and nothing on top. When a shipper keeps its own carriers, the fee is 2% to 0.5% of what Wilson pays them, falling with volume. There are no seat fees, no setup cost and no contract. Timing depends on scope: most teams start on a few lanes and expand from there.
FAQs
Prepaid, collect or third party: which freight terms should we use?
Use prepaid when your company books and pays the carrier, collect when the customer books and pays, third party when another company pays the bill, and prepaid and add when you book and pay but bill the customer for freight. Wilson, by Cartage, an AI logistics agent, books and documents loads with the freight terms set on each order.
What does freight prepaid mean?
Freight prepaid means the shipper pays the carrier for the shipment. The shipper usually chooses the carrier and books the load. The cost may be built into the price, offered free above a threshold or added to the invoice.
What does freight collect mean?
Freight collect means the consignee, usually the customer, pays the carrier. The customer often chooses the carrier and uses its own rates. The bill of lading must show collect terms so the carrier bills the right party.
What is third-party freight billing?
Third-party billing sends the freight bill to a party other than the shipper or consignee, such as the customer's head office or a freight payment service. The bill of lading must name the third party and include its full billing address.
What is prepaid and add?
Prepaid and add means the shipper pays the carrier and then adds the freight charge to the customer's invoice. Agree in advance whether the customer pays the quoted rate, the final carrier invoice, a table rate or a flat fee.
Who is responsible if freight is damaged on a collect load?
It depends on the sales contract and terms of sale, not on the freight terms alone. The party that booked the carrier usually files the claim, but who bears the loss is set by the contract. Confirm with your sales and legal teams.
Does FOB origin mean freight collect?
Not necessarily. FOB terms in a sales contract and freight payment terms on a bill of lading are separate, and companies use them in different combinations. Check the purchase order and your terms of sale for what each one means in your agreements.
What happens if the bill of lading shows the wrong freight terms?
The carrier bills the party named on the bill of lading. If it's wrong, the invoice reaches the wrong company, payment stalls and someone has to ask the carrier for a rebill. Pull the terms from the order to prevent it.
Should we let customers route their own freight?
Yes, when the customer has better rates or needs inbound control and its carriers meet your pickup windows. If routed carriers keep missing pickups, raise it with the customer and offer prepaid and add instead.
How do we stop paying carrier invoices for collect loads?
Check the billed party on every carrier invoice against the freight terms on the bill of lading before paying. If a collect or third-party load was billed to you, send it back to the carrier with the correct bill-to party.
Sources
- 49 U.S.C. 14706, liability of carriers under receipts and bills of lading (minimum claim filing and lawsuit periods): https://www.law.cornell.edu/uscode/text/49/14706
- Cartage, Wilson product FAQ and product scope, October 2026: https://cartage.ai