FOB Meaning and a Brief History
As defined in incoterm, the term FOB stands for Free on Board/Freight on Board has its origin traced back to the days when goods shipped by sail ships were passed over the rail by hand. In that case, it was the term used to generally refer to the goods shipped by sea since it was the major transportation method for shipping cargo from abroad.
However, the usage of this term has changed quite a big deal. And actually, it varies in different countries and jurisdictions. The term ‘pass over the rails’ was then dropped from the definitions available in the incoterm in the amendment passed in the year 2010.
When it comes to North America, the term FOB is written in the sales agreement in order to determine the liability as well as the responsibility of the goods as they are transferred from the seller to the buyer.
FOB - Free On Board Shipping
Times have really changed over the past few years. Today the supply chains stretch as far as the global levels. And in that case, it has become almost inevitable for the supply chains to exist in a country without purchasing or selling products and the raw materials from foreign countries.
With that in mind, you need to know that in the course of any international trades. There must be compliance with the existent cultural differences as well as any international laws that govern trade. However, this could always lead to confusions here and there, when there is a need to interpret the obligations and contractual terms of trade.
One of the most commonly confused terms is the ‘Free on Board’ which seems like quite an ironical name to me. This is because the service is not free at all and the failure to understand that could possibly lead to problems when shipping products from foreign countries.
Such issues could occur in a situation where the party responsible doesn’t take responsibility for damages or the occurrence of any other event. For that reason, it’s necessary that shippers and receivers understand the term free on board. As well as the impact it has on the obligations and responsibilities when shipping goods from abroad. Shall we get started?
What Does FOB Stand For and FOB Shipping?
FOB shipping stands for free on board which in some cases is referred to as Freight on board. Well, this is a set of Incoterms that tend to govern the party that owns as well as pays for shipments to overseas. In that case, FOB stand for a designation that is used to indicate when the ownership and liability of goods are transferred from the seller to the buyer.
In some cases, is used with an identified physical location. Therefore, the designation in such a case determines the responsible party for the freight charges payment. More to that, it indicates the point at which the title for that particular shipment changes ownership and liability from the seller to the buyer.
In the past years, it was only used for the seafaring category of shipments. However, currently, it can be used for just about any mode of transit shipments. Also, it is important to note that although the word free is used in the FOB shipping, it actually doesn’t negate the shipping cost for the goods in transit. The word is simply used to refer to whoever has the liability and obligation to take care of the shipment in transit. The shipping cost is determine by the cubic feet (CBM), volume, distance, weight and other factors.
What is the FOB Shipping Point?
The FOB shipping point is a term that is used in international trade. It tends to specify where the ownership of the goods is transferred from the seller to the buyer. In this case, the FOB shipping point indicates that the liability of the goods is transferred from the selling party to the buyer as soon as the cargo is placed on the delivery vehicle.
Since in the FOB shipping point the ownership and liability of the goods are transferred to the buyer, the legal title of the goods is all transferred to the buyer too. And in that case, the seller is not at any one point responsible for those goods throughout the delivery process.
The seller’s responsibility in such a case is only bringing the goods to the carrier or freight forwarder. Therefore, if anything happens to the goods during the delivery process, the buyer is fully liable and are expected to assume all responsibility.
FOB Origin vs. FOB Destination
These two terms can be a little confusing at times. However, we will give you a more detailed explanation of both.
Well, when an order is labeled as FOB Origin it simply means that any transfer of responsibility or ownership happens only when the goods leave the hands of the seller.
In that case, if the goods need to be shipped to the buyer. It’s the buyer who will pay for the freight charges. In some cases, FOB origin could be referred to with city names. For instance FOB London.
On the other hand, FOB Destination means that the receiver/ buyer takes responsibility and ownership of the goods until they are delivered to the doorstep of the buyer. In this case, the seller tends to be responsible for freight charges of the goods to the buyer. More to that, the seller is also liable for any damages of the goods when they are in transit to the buyer. However, the seller may charge the buyer for these transportation costs.
The ‘Free on Board’ Shipping Terms
When it comes to free on board shipping terms, there are few add-on words. This might be included in the bill of landing, freight invoice or any other forms of documentation used for the shipping process. Such terms include;
Shipping Terms FOB
1-FOB Origin, Freight prepaid:
- The shipper is liable for the shipping cost. While the buyer is responsible for the goods from the point of origin.
2-FOB Origin, Freight Collect:
- The buyer pays for the shipping and freight costs as well as assumes full responsibility for the goods.
3-FOB Origin, Freight prepaid and charged back:
- this means that the seller doesn’t pay for the shipping cost. But instead the seller adds the freight costs on to invoice they send to the buyer. In such a case, the buyer has to pay the bill on a more expensive invoice as the freight costs are included on the invoice. More to that, the buyer assumes full responsibility and ownership of the goods right from the point of origin.
4-FOB Destination, Freight Prepaid:
- this means that the seller pays for all the costs incurred on the shipping until the goods are received by the buyer at their store. In this case, the buyer doesn’t pay for any shipping costs.
5-FOB Destination, Freight Collect:
- this means that the buyer pays for all the shipping and freight costs as soon as the goods are delivered. In this case, the buyer takes ownership and responsibility for their goods until the goods are delivered to their premises.
6-FOB Destination, Freight Prepaid and Charged back:
- this means that the seller takes responsibility for the shipment until the goods are delivered. In this case, the buyer deducts the shipping charges from the invoice. This is because the invoice originally sent to the buyer includes also the freight charges. The deduction is not made until the seller pays for the freight charges.
7-FOB Destination, Freight Collect and allowed:
- this means that the seller adds the costs of the freight to the invoice. In this case, the buyer pays for the shipping charges and the seller takes on the responsibility for the goods until the delivery process is successfully done.
How FOB is used in Shipping Documents?
When it comes to freight shipping, the term could be used in four diverse ways. For instance: FOB Origin, Freight Collect. The first section of the designation determines the location at which the buyer will assume the ownership and responsibility for the goods.
The second section, on the other hand, indicates the responsibility attached to the freight charges. Collect in this case means that the buyer will be responsible for the shipping cost payment. While prepaid means that the seller will pay for the freight charges.
It is always important that buyers understand the Freight on Board designations just in case there are damages that occur. This is because some of the receiving docks may reject delivery of any goods that are damaged instead of just accepting them with a damage notation for the carrier in case of any future claims. Sometimes things could get too complicated when handling shipments.
FOB Accounting Relevance
When it comes to FOB shipping. The shipping costs of the shipment are determined as soon as the buyer takes up the ownership as well as the responsibility of the goods being shipped. And this also impacts the accounting system of that particular company. Therefore, if goods are sent to a FOB shipping point, the sales process gets concluded as soon as the carriers exit the sellers loading dock. This is particularly recorded in the accounting system this way.
However, on the buyer’s side, they need to note down in the accounting system that the shipment comes along with an inventory. And that inventory now happens to be an asset for the buyer. No matter whether the shipment has already arrived at the final destination or not.
Advantages of FOB for the Seller and Buyer
Well, if this doesn’t sound familiar to you. These are the standard guidelines that majorly govern any forms of international trade. In that case, when it comes to shipping that needs to be done internationally. Free on board or freight on board, is the most commonly used agreement.
This is because it determines the responsibility for both the seller and the buyer. More to that, the it defines the point at which ownership and liability get passed on from one party to the other.
It Includes the Customs Clearance
In FOB shipping, the sellers/ suppliers are the ones who are responsible for making clearance for the goods at the export docks. This includes the export clearance documents at the terminal or at the port. This indeed saves the buyer a considerable amount of complications and unnecessary hassle. In this case, it helps to save up both money and time for the buyer.
Effective Shipping Costs Terms
Well, FOB is one of the most commonly used terms for international trade. And I bet, that’s for a reason. This is because this method offers some of the most effective terms for shipping costs. For that reason, it happens to be convenient for most shippers as well as receivers.
The Disadvantages of FOB for Buyer and Seller
FOB is, without doubt, one of the most effective shipment methods for international trades. However, it has a few shortcomings which may majorly affect the buyer. In that, if the buyer gets their goods using Free on Board terms, they are likely to take on the risks. Therefore the costs that are incurred during the shipping process as soon as it is loaded on the carrier for transit. In that case, any loss, damages or even additional costs from then onwards will be the buyer’s responsibility.
One thing I can say is that FOB is a great way for international trade. Since you always have the chance to choose which side of the trade you lie. The best thing about it is that you always have the chance to have full control of your shipping costs and liability of your goods.
Therefore, as you imagine how great it is to export goods and you may not have to pay for the freight charges beyond the port. Just know that this may reduce risks but totally denies you control. In that case, just know what method to use as an international trader.
One time you can be the importer and the next you are the exporter. Just remember to choose what will work in your favor. Also a good place to get better rates is using free load boards