Free On Board (FOB) Explained: What Does Free On Board Mean? Free On Board and Incoterms
According to the Free on Board conditions, the seller is in charge of putting the products on the ship at the designated port of shipping.
The seller is responsible for putting the goods on the ship at the designated port of shipping, but the buyer is responsible for all costs and risks related to the transport. FOB terms are normally used for sea or inland waterway shipping, while Incoterm terms are used for other industries. The buyer is in charge of all risks and expenses related to the shipment as soon as the goods are turned over to the carrier.
What Are Incoterms?
“Incoterms” is the shortened version of “International Commercial Terms.” They are a group of three-letter business terms that were created by the International Chamber of Commerce (ICC) and are used in many international trade agreements.
They are designed to give buyers and sellers a common language to talk about their responsibilities and obligations related to the delivery of goods.
Incoterms’ primary objective is to provide a common understanding of key terminology like “delivery,” “risk,” and “transportation” used in contracts for international trade. This helps to avoid miscommunications and conflicts between partners from different countries with potentially different laws and customs.
The International Chamber of Commerce has produced Incoterms 2020, the official commercial terms (ICC). They offer guidance to buyers and sellers on how to carry out their responsibilities for the delivery of goods under sales contracts for international trade. They are documents that are voluntary, authoritative, acknowledged, and adhered to.
There are several similarities between the Incoterms and the United Nations Convention on Contracts for the International Sale of Goods. All major trading nations are aware of and use the Incoterms.
What Is The Meaning Free On Board (FOB)?
According to the Free on Board conditions, the seller is in charge of putting the products on the ship at the designated port of shipping. From the time the items are loaded onto the ship, the buyer is in charge of all expenses and hazards related to the transport. This covers any loading fees, the cost of transporting the items to their final location, as well as any customs charges or taxes that might be incurred when the commodities are imported into the country of destination.
After the goods are put on the ship, the buyer is responsible for everything about the shipment. This includes getting the goods to their final destination and paying any customs duties or taxes that may be due. In other words, the seller is only responsible for delivering the goods to the named port of shipment and loading them onto the ship.
Because the products must be loaded onto the ship, it’s crucial to remember that FOB terms are normally used for sea or inland waterway shipping. The choice of Incoterm will depend on the specific needs and agreements of both the buyer and the seller, as well as on the norms of the industry.
For instance, in some industries, the buyer might prefer to use “FCA” (Free Carrier) terms, which state that the seller is only responsible for handing over the goods to the carrier and delivering them to the designated location; the buyer, however, is in charge of all risks and expenses related to the shipment as soon as the goods are turned over to the carrier.
What Are Free On Board (FOB) Terms?
Making sure the FOB terms fulfill your company’s requirements is a significant approach to obtaining a competitive edge when exporting and accepting goods on a daily basis.
Free On Board (FOB) Origin – Freight Collect
When a freight carrier picks up the goods and signs the bill of lading (BOL) at the origin pick-up location, the goods are legally in the buyer’s possession and are said to be “FOB Origin.”
“Freight collect” means that the buyer is legally responsible for paying all shipping costs. Additionally, the customer is responsible for all shipping risks. That implies that they are in charge of making claims in the event of loss or damage.
Free On Board (FOB) Origin – Freight Prepaid
“Origin” is the legal term for the fact that the buyer legally owns the item when the carrier picks it up.
When anything is described as “Freight Prepaid,” it means that the seller agrees to bear the risk of all freight charges and claims.
Free On Board (FOB) Destination – Freight Collect
“FOB Destination” means that the seller still owns and has control over the goods until they are delivered. The risk of shipping and responsibility for making claims in the event of loss or damage fall on the seller, who also chooses the carrier.
The term “freight collect” refers to the legal responsibility of the buyer to pay the freight fees.
Free On Board (FOB) Destination – Freight Prepaid
Destination is the legal term for the fact that the seller owns the item until it is delivered without any claims being made against it.
The phrase “freight prepaid” refers to the legal obligation of the seller to cover all freight costs.
What Is The Difference Between Free On Board (FOB) and Free Alongside Ship (FAS)?
Free Alongside Ship (FAS) is a basic method of shipping ocean freight. The supplier must cover the cost of shipping your products up to the designated port of shipment, but not the cost of loading them onto the ship.
Once the shipment is positioned next to the shipping vessel, the buyer is in charge of it.
Contrary to FOB shipping, the supplier is not obligated to guarantee the security of the transfer from port to ship.
What Is The Difference Between Free On Board (FOB) and Cost and Freight (CIR)?
Cost and Freight (CFR) charges the supplier for the expenses incurred in delivering your goods to the destination port.
This includes the price of delivering your freight to the final port of destination as well as any export levies.
Your responsibility begins when the delivery is unloaded in the country of destination.
The cost of delivery to your ultimate location and insurance are not included in the CFR. Customs fees are also not included.
What Is The Difference Between Free On Board (FOB) and Cost Insurance Freight (CIF)?
Cost, Insurance, Freight (CIF) places the provider at financial risk for the payment of – you got it – cost, insurance, and freight.
This indicates that your shipment is in the supplier’s hands, in the figurative sense, while being transported to a port and loaded onto a ship. The price of insurance is also covered.
However, the customer is still responsible for paying extra costs like customs clearance.
Depending on the terms of your contract with your supplier, your goods could be considered delivered anywhere between the port of destination and your final delivery address.
CIF is a more expensive alternative to FOB because the supplier has to do more work and bear more costs.
What Is the Disadvantage of Using Free On Board (FOB)?
The main disadvantage of using the “Free on Board” (FOB) Incoterm is that it places a significant amount of responsibility on the buyer. Once the products have been put on the ship at the port of shipment, the buyer is responsible for all risks and obligations related to the shipment. This includes transportation, customs clearance, and any tariffs or taxes that need to be paid. Because they have to plan and pay for shipping, deal with any customs or regulatory issues, and take on all shipping risks, the buyer may have to pay more money and take on more risks.
Additionally, because the seller is only responsible for loading the items onto the ship at the port of shipment, the buyer may have less influence over the delivery procedure. This may make it more challenging to plan the delivery and raise the risk of delays or other problems with the cargo.
Finally, because the seller is not liable for any shipping expenses after the items are loaded onto the ship, they might be less motivated to make sure the items are packed and sent properly, which could result in higher costs and risks for the customer.
Who Should Use Free On Board (FOB) Incoterm?
In general, the FOB Incoterm works best when the buyer has good logistical skills, knows the costs and risks of international shipping, and is willing to take on all risks and responsibilities related to the cargo.
In other situations, it would be better to use an Incoterm that gives the seller more responsibilities.
Some of the industries or scenarios where FOB might be a good choice include:
Experienced buyers
FOB allows buyers to have more control over the delivery process and take advantage of their own transportation and customs clearance arrangements. This method may be better for buyers who have a strong logistics department or who know a lot about the costs and risks of international shipping.
High-volume shipments
With FOB, the seller is only responsible for putting the items on the ship at the port of export. This can save a lot of money on large shipments.
Short delivery times
FOB is a good option when there isn’t much time to plan for shipping and there isn’t much risk involved. This is because the buyer has more control over the delivery process and can make their own transportation and customs clearance plans.
Buyers who prefer to use their own freight forwarder
Some customers might prefer to work with their own freight forwarder because they feel more confident in their ability to manage the risks involved with the cargo and oversee the delivery process.
Which Incoterm Is Best For Your Business?
Knowing the most common Incoterms used in international shipping contracts is important if you want to understand your obligations and avoid taking unnecessary risks. But you can always ask Forceget for help if you’re still not sure what you need to start doing business around the world.
As experts in international transport operations, Forceget tells exporters and importers to choose the Incoterm that best fits their needs.
