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Freight Payment Terms: A Painful Money Game, Its Purpose, Is There A Better Way?

Freight bill processing can feel like a high-stakes money game between shippers, payors, and transportation providers. For the most part, shippers dread the daunting and time-consuming task of auditing freight bills to process payments to carriers. Meanwhile, carriers – particularly parcel and Less-Than-Truckload (LTL) carriers – face their own set of challenges when issuing invoices and resolving disputes with payors. So, what is the root cause of this painful money game? Complex freight payment terms in transportation contracts.

Yes, if you have a complicated carrier contract, this leads the pack in the many pitfalls to freight bill processing. But why does it have to be this difficult? Could there be a simpler solution? In this article, I’ll dive into the top 10 pitfalls in the treacherous world of freight bill payments. Also, I will explore 8 possible technologies and methodologies that could ease the entire process.

The Basics Of Freight Payment Terms And Why You Need Them.

The Freight Bill Processing Money Game - Freight Payment Terms
The Freight Bill Processing Money Game

First, let’s review the basics of freight payment terms. To explain, freight payment terms are part of a transportation contract between a carrier and shipper. Now obviously, the reason to have these contract terms is to govern how the carrier charges the payor for its transportation services. Additionally, it details how the payor pays for these transportation. Further, there are U.S. government regulations from the Electronic Code Of Federal Regulation (eCFR), part 378, that outlines procedures for freight bill processing and payment. 

Now for ground transportation in the U.S. an invoice is commonly referred to as a freight bill. So based on an agreed upon contract, a payor will use a freight bill audit & payment process to pay the transportation carrier. Surprisingly, the contract’s freight payment terms can be quite lengthy including such things as timeliness of payments, discounts for early payments, late payment fees, and other administrative requirements. 

Further, these freight bill payment terms are very burdensome for both the carrier and the shipper. Indeed, there are many reasons why both parties will agree to extensive and complicated contract terms. First, the payor will take on these additional burdens such as 7-day net pay to receive discounts on their freight charges. Second, the carrier will take on additional burdens such as waiving late fees to secure new business with the shipper. Lastly, another key aspect of freight payment terms is who pays the freight bills. It is not always the shipper. So payment terms can be very complicated, but basically there are three types of payors.

Types Of Freight Payors
  • Prepaid Freight.  The shipper is responsible for all shipping charges. Especially if you are a large volume shipper, this is the best option for shippers. This is because normally a large shipper is able to negotiate a great discount rate with the carrier.
  • Collect Freight. In this case, the consignee, the receiver of the shipment, is responsible for paying the shipping charges. For International shipments, this includes taxes and duties.
  • Third-Party Freight. With third party payors,neither the shipper or the consignee pays for the shipment. For example, a freight broker or third party logistics (3PL) is paying for the shipment.

Now there are other terms of sales, especially for International shipping. These terms of sales are called incoterms which are a set of internationally recognized rules which define the responsibilities of the sellers and buyers. Specifically, for a given shipment these Incoterms specify who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities. For more information on incoterms, see International Trade Commission’s Know Your Incoterms.

For more information on the basics of freight bill terms, see RiteRounting’s Three Main Types Of LTL Freight Charges. Also, for a detail review of the steps to process freight bills, see my article, The 7 Steps To Process, Audit, And Pay A Carrier’s Invoice.

The Pitfalls Of The Freight Bill Payment Money Game.

As discussed, the freight bill and payment process can often be a complex and time-consuming endeavor, leading to various pitfalls for both shippers and carriers. One common challenge is invoice discrepancies, where errors or discrepancies in billing information can lead to delays in payment or even disputes. Another pitfall is the manual nature of the process, which increases the likelihood of human error and inefficiencies. To detail, below is a list of the ten most common pitfalls with freight bill processing & payment.

10 Pitfalls With Freight Bill Audit & Pay

  • 1. Surprise Freight Bill Fees and Surcharges.
  • 2. Shipper Inaccurate With Their Shipment’s Freight Classification Or Dimensions.
  • 3. An Over Complicated Freight Bill and Audit Process.
  • 4. Unnecessarily Tying Up Cash Flow and Working Capital In Freight Bill Processing.
  • 5. Having Poor Visibility into Transportation Spend.
  • 6. High Labor Costs Handling Freight Bill Errors And Overcharges.
  • 7. Incurring Late Freight Bill Payments and Penalties.
  • 8. Regularly Having To Dispute Freight Bill Charges And Lengthy Resolution Processes.
  • 9. Losing Trust In Carrier Due To Their Lack of Transparency in Their Billing Practices.
  • 10. Over Complicating Freight Bill invoicing With Different Discounts Depending Who Is Paying The Freight Bill.

For detailed discussion on these pitfalls, see my article, Spotlight On Freight Bill Payment: 10 Pitfalls To Best Overcome.

Spotlight On Freight Bill Payment: 10 Pitfalls To Best Overcome.

Navigating through the freight bill and payment process can be quite a maze, causing headaches for shippers and carriers alike. One common challenge is invoice discrepancies, where even the smallest error in billing info can result in payment delays and disputes. Moreover, the manual aspect of handling these tasks invites human errors and sluggishness.

So, let’s dive into the top ten pitfalls to avoid when processing and paying freight bills. But don’t think this is all bad news. I also have some possible solutions to get us out of this mess! Click here to explore some solutions and tips to help make freight bill audit and payment easier.

Exploring New Technology And Methods As Alternatives To Traditional Freight Invoicing And Payment.

In recent years, advancements in technology have paved the way for alternative methods to traditional freight payment terms. Many of these advancements do help to streamline freight bill audit & payment, but beware and do your due diligence. Indeed, a quick fix or a hype-filled sales pitch may lead to worse problems. Below I list the major ways that you can streamline your payment process to pay carriers for their transportation services.

1. Simplify Your Freight Payment Terms.

In many cases, just simplifying your freight payment terms is the easiest way to streamline your freight bill audit and payment process. Just work with your carriers to simplify your freight payment terms. Indeed, I have seen many transportation contracts that consist of dozens of pages and multiple amendments. Look at ways to reduce the size of the contract as this just means there are more things that need to be audited. Or worse, verbose contract language can cause the payor to overlook key contract terms that are the primary cost drivers.

2. Leverage A 3rd Party Audit & Pay Provider.

A 3rd party audit & pay provider is a company that verifies and processes freight invoices on behalf of shippers, ensuring accuracy and compliance. For example, a logistics company may hire an audit & pay provider to review invoices, reconcile discrepancies, and make payments to carriers. The downside of using a 3PL is that the 3rd party controls key detail shipment data that you could use for data analytics to improve your shipping operation.

3. Implement An Automated Freight Payment Systems EDI / APIs.

Automated freight payment systems use electronic data interchange (EDI) or application programming interfaces (APIs) to streamline the invoicing and payment process. For instance, a transportation management system (TMS) can integrate with a carrier’s system through APIs to automatically generate invoices and initiate payments based on agreed-upon rates. The downside of this solution is that there are significant upfront costs and IT integration expertise needed to implement these types of systems in-house.

4. Leverage Artificial Intelligence (AI) Automation For Invoice Processing Analytics.

AI technology can be used to automate invoice processing by extracting relevant data, validating accuracy, and flagging potential errors. For example, AI algorithms can analyze invoice documents, extract key information such as shipment details and amounts, and cross-reference them with predefined rules to ensure accuracy. In this case, it is important to compare these “AI-powered” systems against traditional automated freight payment systems. It may be the case where the realized benefit does not justify the additional costs.

5. Use Blockchain And Smart Contracts.

Blockchain technology enables secure and transparent transactions through decentralized ledgers and smart contracts. In freight invoicing, blockchain can be used to create immutable records of transactions, automate payment terms based on predefined conditions in smart contracts, and provide visibility across the supply chain. One of the major challenges of blockchain-powered invoicing agreeing on standards and freight payment terms. Indeed, the main reason for blockchain’s slow adoption rate for invoice processing is that this technology requires the service provider and payor to agree and invest in setting up a blockchain-based invoice.

6. Start Using Instant Payment.

Instant payment refers to the immediate transfer of funds upon invoice approval, eliminating delays in payment processing. For instance, a shipper may use real-time payment platforms that enable instant transfers to carriers upon invoice verification. Of course, this is a major benefit to carriers to get paid faster. However, payor’s working capital will be adversely affected. For more on electronic funds transfer (EFT) trends, see my article, Business EFT Payment Trends: Now And The Best Opportunities Ahead.

7. Use Cryptocurrency As An Alternative Payment Option.

Cryptocurrency can be used as an alternative form of payment in freight invoicing, providing faster transactions and reduced fees compared to traditional banking systems. For example, a shipper may offer cryptocurrency options like Bitcoin or Ethereum for carriers to receive payments. In some cases, such as international shipping, there are real benefits to carriers offering a cryptocurrency option for receiving payments. Of course, cryptocurrency has several disadvantages to include price volatility and lack of financial regulatory controls.

8. Implement A No Invoice Option: Pay Based On Electronic Shipment Manifest And IoT Data Capture.

This particular solution is really “thinking outside the box” in that it precludes the carrier from having to present an invoice to the payor. For example, if you are a data-centric business already using business intelligence (BI) reporting, you may already have better data on a shipment than what a carrier provides in their electronic invoice. This includes all shipment characteristics such as dimensional weight and shipment status such as proof-of-delivery (POD).

In this case, why can’t you just pay off your data instead of a carrier’s invoice? This would save significantly on costs for both the carrier and the payor by eliminating invoice processing and auditing. For instance, the payor would make payment calculations based on electronic shipment manifest or bill of lading (BOL), carrier shipment status, and Internet of Things (IoT) data capture. Now, the carrier would still have the opportunity to submit an adjustment where they felt short paid. At the same time, both carrier and the payor would be motivated to minimize payment discrepancies over time by making sure the payor has all the data to make an accurate payment. 

For more from SC Tech Insights, see articles of shipping and finance.

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