A guide to understand the freight payment process (+5 tips to improve accuracy)

Ever heard people say, “You need a PhD to understand freight payment”?

While you may not necessarily need an actual doctorate, you will likely encounter a steep learning curve when tackling the ins and outs of freight payments. It regularly challenges shippers and brokers as they adjust to serve customers, stay ahead of competition, and turn a profit.

Dated payment methods can’t keep up with all those moving parts. That’s why companies turn to modern technology to better control their freight payments and processes.

Keep reading for a deep dive into how freight payments work, common challenges, and tips for improving freight payment accuracy.

What are freight payments?

Freight payments are financial transactions to compensate for the transportation of goods. This exchange of finances occurs between shippers and transportation providers, whether a carrier or broker.

You need to track different payment types and terms based on the party responsible for executing the invoice. Due to the fragmented and capital-intensive nature of the supply chain, numerous supply chain financing options have emerged to address the limitations of standard payment processes.

Here’s the breakdown based on who is responsible for making the payment:

• Prepaid: When you see “prepaid” listed on a shipping agreement, the shipper is responsible for fulfilling all costs associated with the transportation of goods. Remember: “freight prepaid” and “prepaid and add” are sometimes used interchangeably but mean the same thing.

Shippers do not need to pay the freight charges up front. They may offer supply chain financing to help float the payment to the carrier earlier through quick pay financing.  This payment approach has been around for decades. It grants shippers the control that the carrier needs to deliver before payment. To carriers, though, this puts a significant stress on cash flow and financial viability in a very capital-intensive market.  Did you know? Around 60% of a carrier’s costs are associated with vehicle expenses.

• Collect: The consignee, or receiver, will arrange the freight collection and pay the freight charges upon delivery. It’s common for shippers that prefer to control carrier selection and service management. If they believe they’ll have a stronger negotiating power in certain geographies, they may have Collect freight.

Why would you opt for Collect? In short, freight collect grants you more control over your final costs. It reduces the number of transactions on a single shipment, thus cutting back on your overall costs. Instead of relying on the shipper to cost-effectively organize freight transport, you have power to optimize it.  For the shipper, freight collect means they’re not responsible for shipment liabilities linked with the transportation of goods. Factors like purchasing technology or hiring employees quickly become expensive, so shippers are off the hook with Collect.

• Third-party: A third-party payment processor may be involved in the transaction. It could be a financing or factoring company where the carrier will invoice a different party.

Sometimes you’ll encounter overlap between a third-party payment process and a third-party logistics provider (3PL). A 3PL pays the freight charges to the underlying carrier but may choose to elect a payment processor on their behalf. Invoicing, settlement, and payment is a complex web of financing that Loop helps to simplify.

• Free On Board (FOB): The FOB point is the location wherein the responsibilities, including both risks and costs, for a given shipment transfer from the shipper to buyer. Here’s the average breakdown:
  • FOB shipping point (origin), freight prepaid: The consignee takes responsibility for the shipment at its origin, but the shipper pays for the transportation of goods.
  • FOB shipping point (origin), freight collect: The consignee takes responsibility for the shipment at its origin and pays for the transportation of goods.
  • FOB destination point, freight prepaid: The shipper is responsible for the goods and pays all fees linked with their transportation.
  • FOB destination point, freight collect: The shipper is responsible for the goods until delivery. At delivery, the consignee pays for freight transportation.

Here’s the breakdown based on when the payment is due:

• Prepaid and add: The shipper pays the freight charges up front and adds them to the invoice for the goods. This setup is typical for domestic shipments.
• Prepaid and chargeback: The shipper pays the freight charges up front and then invoices the consignee for them separately. You’ll see it used for international shipments or when the price of goods doesn’t include freight charges.
• Collect freight collect (CFC): The consignee pays the freight charges at delivery. Because they assume financial responsibility, they’re responsible for any surcharges or accessorials on that shipment. This payment type is often more expensive than other options.

Your contract terms lay out the expectations for how you should handle freight payment: payment method, invoice compliance (what documents are needed to complete the payment), and payment terms.

How do freight payments work?

In most cases, here’s how a freight payment sequence plays out:

1. Establish a price or quote. The shipper or 3PL negotiates with the 3PL or carrier to establish pricing terms within a contract. It’s either a contracted rate or a spot rate.

• Spot rate: A single-use rate for a shipment job requested on demand. Spot rates reflect the current freight market price. You might see them referred to as a flat fee or spot quote.
• Contract rate: A service rate agreed to in advance and for a period of time. The terms of the agreement are outlined within the contract. However, the agreement is flexible. Shippers can renegotiate contract terms at any time.

2. Signing and implementation of contracts. This step includes defining the payment terms, rates, and shipping conditions agreed upon in the contract.

3. Scheduling of shipments and loads. Per the conditions of the shipment (contract or spot, lanes, volume, location, mode – full truckload, less-than-truckload, etc.), loads are scheduled for departure and delivery.

4. Shipment executed. The shipments depart the facility and arrive at their final destination.

5. Invoices created. The carrier or 3PL creates invoices to send to shippers or 3PLs.

6. Invoices sent and received. Shippers or 3PLs receive 3PL or carrier invoices.

7. Audit. Shippers run an audit on the invoices to determine their accuracy.

• Document collection. Invoice recipients collect all necessary shipment documents to accurately audit the invoice.
• Reconciliation. Invoice recipients compare received invoices to purchase orders, shipment packets, bills of lading (BOL), proof of delivery (POD), and any other documentation to verify invoice accuracy.
  • Rate audit: Shippers compare the rate they were charged against rates listed in their carrier agreement to ensure validity.
  • Service audit: Shippers compare the service they receive from carriers to the terms outlined in their contract, ensuring they get the service they purchased.
  • Accessorial audit: Shippers review the accessorial charges to ensure they are accurate and in compliance with contract terms.
• Audit result
  • Discrepancy found. If shippers find a discrepancy, teams will run a claims management until they resolve the error. The claims management process ensures any billing errors, freight losses, or cargo damages are properly repaid.
  • No discrepancy found. If no discrepancy exists, the shippers approve the invoice.

8. Process invoice payment. Invoices get fulfilled with different freight payment systems like Loop, enterprise resource planning systems (ERPs), bank portals, and manual checks. With a variety of payment orchestration processes, there is greater control to ensure invoices are paid at term. ACH is the fastest and lowest-risk mode of payment.

The ideal process for freight payments includes invoices that are indisputable and verifiable. Yet, in 20% of instances, that isn’t the case.

Often, these mistakes happen upstream, but companies don’t discover them until they’re auditing invoices – if accurate processes are in place to find the errors.

9 most common mistakes in managing freight settlement

A streamlined freight payment process relies on invoice and process accuracy. Let’s break down the most common mistakes between both sides of the transaction: Accounts Receivable (AR) - party responsible for sending the invoice and Accounts Payable (AP) - party responsible for approving and paying the invoice.

AR party (carriers and brokers)

1. Incorrect implementation of contract rates. Many discrepancies occur due to incorrect implementation of freight rate cards. Often, it’s because someone has inaccurately entered the numbers into a transportation management system (TMS) or the rate wasn’t updated in the contract. It’s an accident, but it means big reconciliation and cost consequences.
2. Invoices missing necessary accessorial information. If accessorial fees appear on invoices, but the documentation to validate those fees is nowhere to be found, complications in freight payment fulfillment occur.
3. AR teams fail to implement fixed errors. Sometimes audits catch mistakes and address them early. However, if the payer AP team doesn’t communicate the change to the payee AR team, the incorrect invoice amount is paid.  Pro tip: Every invoice discrepancy is a “defect.” By identifying the root cause you can address underlying structural issues (incorrect rate keyed into your TMS, a scale malfunction at a facility, etc). This improves budget accuracy and ensures you don’t spend time fixing the same issue again and again and again. Talk to your AP and AR teams and have them document for one day what percent of their activities are reacting to a symptom versus fixing an underlying issue.
4. Account credits were applied incorrectly. When a payer (a shipper or 3PL) accidentally overpays on an invoice, they accrue account credits. Payers leave money on the table if they don’t ensure these credits are accurately applied on the following invoice.
5. Incorrect billing location. The billing location captures where the freight was picked up or delivered. It determines the rate, accessorial charges, and other payment terms. If the billing location is incorrect, there’s an increased risk of overpayment, reporting discrepancies, and issues with compliance.

AP party (shippers and brokers)

1. Audits fail to catch inaccuracies, resulting in overpayments. Shippers and 3PLs overpay when the freight invoice auditing process fails to catch invoice errors. Only sometimes are these overpayments identified when audits are conducted manually. Many companies establish margins of error on invoice tolerance to help with resource efficiency. However, these incremental errors add up to millions of dollars across a fiscal year.
2. Relying on mailing paper invoices. Using paper invoices increases the chance of the invoice being delayed or lost in the mail.
3. Outsourcing freight audits. Many shippers think bringing in a third party to assess their freight spend is the most effective solution. However, more often than not, it results in increased data silos and invoice errors due to manual bunker purchase order (BPO) audits. Shippers end up spending more money attempting to fix a symptom, not the structural problem.
4. Multiple operating systems. Companies that grow through acquisition often have multiple transportation systems, rate databases, and a jigsaw puzzle of rate sheets and contract terms. This fragmentation leads to incorrect rules being established and operational changes that don’t get updated until payments have already been sent out.

4 ways to improve freight payment accuracy

1. Get high-quality data

To avoid the most common mistakes in freight payment, you must establish a baseline of accurate data. Without it, you’re attempting to assess and make decisions based on incomplete information.

Data can be accurate but if it’s siloed in different systems, you’re only getting a limited picture. Here’s the catch: Many shippers and 3PLs don’t have the time or means to centralize and standardize their data. They’re dealing with paper documents, spreadsheets, PDFs, APIs, and messy electronic data interchange (EDI) feeds filled with unorganized and duplicate data.

In lieu of having technology, many companies have operational staff or temp resources manually entering this data, this is an unnecessary cost to the business. In addition, to get any metrics out of the data, companies have to find or hire an analyst to build a local dashboard to make sense of what insights can be gleaned. As a dynamic and resilient supply chain is table stakes to compete in many markets, these skeleton processes can’t be sustained.

Software like Loop extracts data from where it’s trapped in shipping documents, then cleans the data and standardizes it in one unified platform. Loop unlocks high-quality data that was previously inaccessible to improve decision quality. Better decisions means better efficiency and profitability.

2. Automate audits to improve efficiency

Without automation, freight audits are time-consuming and error-prone. Outsourcing to legacy providers is expensive. It relies upon someone who doesn’t have a nuanced knowledge of your network to find cost-savings opportunities.

Logistics-AI, like Loop, automates the audit workflow to ensure 100% financial compliance and streamline processes. Software, not humans, checks for issues.

You’ve surely experienced challenges with verifying detention fees based on shipment check-in and checkout times as noted on the BOL. You also have probably tried to understand why you keep on getting hit with a re-weigh accessorial for several carriers. It likely took time your team doesn’t have.

Software with root-cause analysis notifies you faster and helps you address the underlying issues. Finding a mistake and attempting to resolve it no longer needs to be time-consuming and expensive.

3. Reduce risk by avoiding paper checks

The United States Postal Service (USPS) reported that mail theft complaints doubled in 2021. As a result, it warned people to stop sending paper checks through the mail.

Most shippers know that mailing paper checks increases the risk of fraud or loss. It’s why an increasing number of companies are turning to digital payments. They use software such as Loop to reconcile invoices and digitally fulfill payments after the invoice has been approved.

Carriers and 3PLs have different payment requirements. The payer needs flexible payment orchestration capabilities to meet different payees needs. Streamlined and digitized payment processes offer more flexible options for payees, which boosts the likelihood of invoices paying and getting paid at term.

By automating carrier payments, you increase financial controls and visibility while opening up financing tools.

4. Modern payments increase working capital

Improved financial controls mean you can make the most of each payment, whether it’s properly aging invoices or offering quick pay discounting to your carriers.

When you pay each invoice at term every time, you hold on to working capital longer. Too many shippers and brokers don’t have the proper financial controls to pay to term every time. This means they make payments too early or too late, which erodes their margins.  

Intelligent software like Loop accurately ages invoices. It allows you to correctly execute your payment based on each individual carrier contract’s terms.

When you have modern financial controls and payment options, you unlock review-driving events. Loop audits invoices in four hours, not weeks or days like legacy audits. This means that you have the financial controls to offer your carriers quick pay discounting. Loop’s platform activates and manages quick pay programs for customers whether it’s self-funded or used with a third-party financial provider.

Modern payments turn a cost center into a profit driver, giving you the confidence your business is set up for long term growth.

Simplify your freight payments with Loop

Complex freight payment operations result in errors, delays, and lost revenue. You need a unified platform with freight technology that helps manage costs. By centralizing all shipment and spend data, you can automate workflows and unlock profit-driving financial tools.

Loop is the trusted solution.

Loop accurately captures and stores your real-time freight data to help streamline payment processes. It uses logistics-AI to ensure operations run smoothly. You can automate audits, so when you receive an invoice, Loop promptly assesses its accuracy. This allows you to cut payment processing time down to mere hours.

Contact Loop today to simplify your freight payment and accurately manage freight costs.