Full Form of FOB - Definition, History, Examples, How it Works? (2024)

Full Form of FOB - Freight on Board

The Full Form of FOB is Freight On Board. It is also known as free Onboard. FOB is a legal term that defines the point at which the risk and cost of the goods being shipped shift from the selling party to the buying party. FOB is a law defined by the ICC (international chamber of commerce) and accepted across the globe in modern days.

• FOB stands for Freight On Board or Free Onboard. FOB is a global law determining when buyers become responsible for shipping expenses. The International Chamber of Commerce established it.
• FOB originated in the era of sailing ships when people passed goods over the rail. However, in 2010, the manual passing of ships was removed from the informal definition of FOB.
• FOB Origin/Shipping Point and FOB Destination are two types of FOB. These types refer to when the cost and risk (liability and responsibility) of the goods being transferred or shipped are associated with a particular point.

Explanation

Whenever goods and products are exported to a different country, there is a risk of being destroyed, damaged, or lost within international borders. The FOB defines the point until the seller owns this risk and when it is transferred to the buyer. Accordingly, in the event of loss or damage, the seller or the buyer bears the cost. In other words, FOB describes when the supplier ends his responsibility for the goods being shipped to the buyer. Generally, the seller pays for the shipping cost to a major port or the shipping destination, and the buyer pays for the transportation from the warehouse to his stores.

History

FOB's origin goes back to when sailing ships were the main and only means of transportation for the countries' goods. Back in those days, goods were passed over the rail by hand, and in 2010, passing the ships manually by humans was excluded from the informal definitions of FOB.

Types

Based on the point when the cost and risk (liability and responsibility) are associated with goods transferred or shipped cargo, there are two types of FOB.

#1 - FOB Origin/Shipping Point

This means the transfer of liability and responsibility happens at the seller's shipping dock. That is where the origin of the trade of goods begins. When the goods are safely on board, the buyer must bear the transportation expenses and liabilities during the shipment. This type of FOB is sometimes referred to as the FOB shipping point.

Example – The sales agreement's shipment from Beijing to Los Angeles is written as "FOB origin Beijing Jan 2020".

#2 - FOB Destination

In this type of FOB Destination, the transfer happens only after the goods have reached their destination, which is then shipped cargo to the buyer’s store. The seller will bear all the transportation overheads and liabilities associated with transportation.

Example – Sales agreement is written as “FOB Destination Los Angeles Jan 2020”.

Examples of FOBs in the Usage

• FOB shipping point freight prepaid by seller - Seller pays the cost, and the buyer owns the liability from the origin.
• FOB shipping point freight collected by the buyer - The pays for the transport and owns responsibility from the origin of the shipment.
• FOB shipping point and Freight prepaid by the seller and charged back to the buyer - The seller doesn’t pay for the transport but charges the buyer with a premium invoice and sends it to the buyer to pay.
• FOB shipping destination, freight prepaid by the seller - The seller pays all the cost, and the buyer owns responsibility only after receiving the shipment. The buyer will not pay any shipping costs.
• FOB shipping destination, freight collected from buyer - Buyer pays for the transport only at the time of delivery and takes responsibility only after the delivery of goods.
• FOB shipping destination, freight prepaid by seller and charged back - Seller bears responsibility till the delivery, and the buyer deducts the cost from the invoice.
• FOB shipping destination, freight collected by the seller and allowed - Seller adds the invoice’s cost, and the buyer pays the premium invoice, but the seller owns responsibility till delivery.

FOB (Freight On Board) vs CIF (Cost, Insurance and Freight)

• FOB and CIF are international trade terms used to buy and sell cargo goods defined by the international border. Each definition is dynamic and will vary from country to country. It’s all about how the seller and buyer have negotiated the terms during the sale agreement.
• The cost of transport, insurance, and other charges in CIF is passed on to the goods' seller. The buyer takes ownership of the goods from his port or store and owns responsibility from that point.
• FOB is used globally across the export market, whereas the CIF is usually used when the shipment involves any fragile, delicate, or perishable goods. The risk involved in transporting goods safely to the destination is high. Hence, it is advisable to ensure the goods and the cost is to be borne by the goods' seller.
• Cost Insurance and Freight are also used in the case of the small seller/supplier. In these cases, to make the deal fruitful, the seller bears the cost and makes the sale agreement as per CIF incurring insurance and transportation cost. The buyer need not believe the seller's authenticity due to his not-so-known reputation.
• CIF is effective and useful if one executes the deal from the seller's perspective because the profit margins will increase. The loss will be covered by the insurance already in place. FOB is effective and useful if the deal is executed from the buyer's perspective. Whereas FOB saves the cost (transportation and other overheads) for the buyer, he has to worry about taking delivery in his warehouse or store directly.

Conclusion

FOB is the trade term that usually comes into the picture in the case of international trades. When the goods are being transported between countries, either party (seller or the buyer) has to bear the cost involved in shipping. Someone also has to take responsibility and ownership of the goods at every point in supply chain management (SCM). This is where the FOB comes into the picture. Both parties define the FOB during the sale agreement by agreeing to certain terms.

FOB has mainly two types based on the expenses either party bears. Accordingly, the parties involved in the trade agreement on any one of the terms and execute the deal. In the case of a small seller who doesn’t have much reputation, CIF is used. The seller ensures the goods and passes on the risk to the insurer. This can also be used if the shipped goods are fragile or perishable. FOB can also be used in these scenarios and is accepted globally with slight changes in the definition from country to country. Any party involved in the shipping of goods should and must define the type of FOB in their sale agreement to avoid discrepancies and differences in the deal's future.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to the Full Form of FOB, i.e., Freight on Board and its definition. Here we discuss the history, and types of FOB along with examples and its differences from CIF. You may refer to the following articles to learn more about finance –

• Full Form of SLR
• Full Form of CIF
• Full Form USP
• Full Form LAB
• Full Form MRO