“Freight Allowed” is a commercial term that addresses the payment responsibility for shipping goods between a seller and a buyer. Understanding this term dictates who handles the costs associated with moving inventory through the supply chain. This distinction is necessary for accurate financial planning and proper inventory pricing for any business involved in buying or selling physical goods. The designation determines whether the logistics expense is absorbed by the shipper or the receiver, impacting overall profitability and pricing strategies.
Defining Freight Allowed
The term “Freight Allowed” specifies that the seller is responsible for paying the freight charges for transporting the goods to the buyer’s designated destination. This payment agreement means the financial burden of transportation is absorbed by the seller. The seller manages logistics by contracting the carrier directly and paying the resulting invoice. The seller typically includes the cost of shipping within the total price of the goods or absorbs the expense as a cost of sale to offer a delivered price. This arrangement ensures the buyer does not receive a separate bill for shipping services from the carrier.
Financial Impact on the Buyer and Seller
This shipping term has distinct economic consequences for both parties involved. For the buyer, “Freight Allowed” means the cost of goods sold (COGS) already includes the transportation expense within the invoice price. Although the buyer does not pay a separate freight bill, the seller has factored that expense into the final purchase price. This simplifies the buyer’s procurement and accounting processes by providing a predictable, single delivered cost for the product.
The seller must manage this arrangement carefully, as “Freight Allowed” directly impacts the gross margin of the sale. The seller must accurately account for variable freight costs when setting the product’s selling price to ensure profitability. This requires robust cost accounting to track expenses and negotiate favorable rates with carriers to prevent transportation costs from eroding the margin. The term is often used interchangeably with “Freight Prepaid,” which also means the seller pays the charges upfront.
In some transactions, particularly under terms like FOB Destination, Freight Collect and Allowed, the buyer may pay the freight carrier initially. The seller then deducts that exact amount from the total product invoice. Even in this scenario, the seller still ultimately bears the cost of the freight expense, making the arrangement functionally similar to the seller absorbing the cost entirely. Understanding the subtle difference between “Prepaid” (seller pays carrier) and “Allowed” (seller bears cost, possibly via a deduction) is important for financial reconciliation.
Distinguishing Freight Allowed from Other Common Shipping Terms
“Freight Allowed” is best understood by comparing it to other common terms that determine payment obligations. The direct opposite is “Freight Collect,” which mandates that the buyer pays the freight charges directly to the carrier upon the goods’ arrival. In this case, the seller arranges the shipment, but the financial liability rests entirely with the receiver.
The term “Freight Prepaid” is nearly synonymous with “Freight Allowed,” as both mean the seller pays the carrier for the transportation service. A key distinction is “Freight Prepaid and Charged Back,” where the seller pays the carrier but then invoices the buyer for the expense. These payment terms are frequently combined with other legal terms of sale, such as Free On Board (FOB).
Terms like Free On Board (FOB) determine when the risk and title of the goods transfer to the buyer. For instance, “FOB Origin” means risk transfers the moment the goods leave the seller’s dock. Even if a shipment is designated as “FOB Origin, Freight Allowed,” the payment term only covers the cost of shipping, while the risk of loss or damage during transit falls on the buyer. These shipping terms are sometimes part of broader, internationally recognized frameworks like Incoterms.
Understanding Risk and Responsibility Transfer
A common area of confusion is the distinction between who pays the freight and who holds responsibility for the goods in transit. “Freight Allowed” is solely a financial term that dictates which party pays the transportation bill. It does not determine the point at which ownership, liability for loss or damage, or insurance responsibility transfers. This separation of payment and liability is a fundamental concept in commercial shipping agreements.
The transfer of risk is determined by separate contractual terms, most often using the FOB designation or specific Incoterms rules. For example, under “FOB Destination, Freight Allowed,” the seller pays the freight and retains all responsibility until the goods are safely delivered. Conversely, under “FOB Origin, Freight Allowed,” the seller pays the freight charge, but the buyer assumes the risk of loss the moment the goods are placed onto the carrier.
Strategic Reasons for Using Freight Allowed
Sellers often use “Freight Allowed” as a strategic business decision to gain a competitive advantage. By offering a delivered price, the seller simplifies the purchasing process for the buyer. The buyer avoids the administrative burden of managing and paying separate freight invoices, making the seller’s product more appealing than a competitor’s that uses a “Freight Collect” arrangement.
A seller may leverage this term to meet Minimum Order Quantity (MOQ) requirements, offering “Freight Allowed” only when an order is above a certain size or value. The seller also gains better control over shipping logistics and can secure more favorable contract rates with carriers due to high volume. By managing shipping in-house, the seller utilizes these discounted rates, absorbing the cost while maintaining a healthy profit margin.