If you’re importing products from another country, how do you know who owns the goods while they’re in transit? At what point do the goods transfer from seller to buyer property? Who is responsible for damages, fees, and costs at the various points along transit? These questions of ownership and risk are what the term “FOB” resolves in international contracts between supplier and buyer.
What Is FOB?
FOB is an international commerce term (Incoterm) meaning “free on board” or “freight on board.” FOB helps determine when liability, risks, costs, and ownership of goods transfers from the seller to the buyer. It determines two key facets: 1) at what physical point the title of goods transfers and 2) who is responsible for transport costs and fees.
Why does this matter? FOB legally determines at what point responsibility is passed. What happens if your goods are damaged in transit? Who is responsible for handling the claims and insurance? Who owns the goods while they go through customs? The agreed-upon FOB settles any legal or communication concerns with regards to possession and liability.
Understanding FOB Terms
FOB can be found in four different ways:
• Origin, Freight Collect
• FOB Origin, Freight Prepaid
• FOB Destination, Freight Collect
• FOB Destination, Freight Prepaid
The first portion determines the point at which the buyer takes control of the title and risk of the goods: whether at the origin or the destination. FOB Origin is more common, where the buyer assumes ownership of the goods the moment that the freight carrier picks up and signs for the package. That means that the buyer is responsible for the goods during the entirety of its transit. In the cases of FOB Destination, the seller retains ownership of the goods until they are delivered to the buyer’s port.
The second portion indicates who will pay for the charges and fees related to the shipment of the goods. Prepaid means that the seller has paid the charges; Collect means that the buyer is responsible for all freight charges. Often, this will also determine who is liable for risk and insurance. Freight Collect is more common, where the buyer is responsible for all freight charges and assumes all risk for transport.
In some cases, the costs and risk will be divided between seller and buyer, as designated by the terms “Destination” and “Prepaid.”
However, overall, the most common FOB term is FOB Origin, Freight Collect. This means that the buyer immediately assumes ownership and liability when the seller loads the goods on the freight carrier. Basically, the seller can mark the goods as “complete” in their books and the buyer handles the rest. The buyer then pays delivery charges, insurance costs, customs fees, and more. The buyer is responsible for all potential damages (along with the insurance company and the freight hauler).
Why Choose FOB
FOB is generally the cheaper option for buyers and importers. Although FOB buyers have to pay the costs of freight, insurance, and unloading expenses, this usually is still less expensive than having to pay seller fees for other types of ownership transfer agreements, like CIF. FOB is generally a more competitive freight rate.
Moreover, FOB Origin gives more control to the buyer. Buyers have the ability to choose their own freight forwarder, so they have more access to information about their freight transport and timeline. They can also more easily track their packages and handle their own disputes with customs or freight carriers.
Sellers also like FOB because they don’t have to handle as many shipping concerns. If the items are damaged or lost during transit, the sellers hold no responsibility. The buyers must handle all of the claims and damages, assuming all related costs.
Note that a freight hauler or shipping company is still liable for any damage caused in transit. However, in the case of FOB Origin, the carrier would work solely with the buyer and the buyer’s insurance to settle any claims or disputes.
The Bottom Line
FOB is often recommended for buyers because it offers greater control at a lower price. In most cases of FOB, the process looks like this:
• The seller loads the good on the freight vessel of the buyer’s choice.
• The seller clears goods for export in their country.
• The freight hauler picks up and signs for the package, at which point the title of goods transfers to the buyer.
• The buyer is then responsible for insurance costs and risks associated with freight transport throughout the remaining duration of the transit.
Is FOB right for your importing business? Contact LTX Solutions now to discuss the best types of shipping contract and transfer of ownership for your imports.
FAQs
FOB means Free On Board and is when the seller takes care of all shipping documentation and delivers the goods to the ship. Once aboard, the transportation risk passes from the seller to the buyer. You then pay for the freight to get to your destination, but the seller pays for the export customs clearance.
What is the meaning of FOB? ›
“Free on board” is what FOB stands for. It is a designation which indicated that the liability and ownership of the goods have been transferred from a seller to a buyer. This means that if the goods get damaged or destroyed during the shipping, the seller is not liable.
What is the meaning of FOB in trucking? ›
FOB stands for “free on board” or “freight on board” and is a designation that is used to indicate when liability and ownership of goods is transferred from a seller to a buyer. Free on Board: Free on board indicates whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping.
What is an example of a FOB? ›
Examples of FOBs in the Usage
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.
What does FOB cost stand for? ›
FOB stands for “Freight on Board”. Another term sometimes used for this is “Free on Board” depending on who you are talking to. These terms indicate who pays the cost of transportation.
What are the types of logistics FOB? ›
There are three variations on FOB Destination terms, which are:
- FOB Destination, Freight Prepaid. The supplier pays the freight charges and owns the goods while they are in transit.
- FOB Destination, Freight Collect. ...
- FOB Destination, Freight Collect and Allowed.
synonyms for fob
On this page you'll find 9 synonyms, antonyms, and words related to fob, such as: buck, cap, dandy, dude, fool, and hinge.
Who pays freight on FOB? ›
In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin. Once the goods are at the point of origin and on the transportation vessel, the buyer is financially responsible for costs to transport the goods such as customs, taxes, and fees.
Does FOB mean free freight? ›
Freight on board, also known as free on board, refers to a set of Incoterms that govern who owns and pays for a shipment when traveling overseas. Although its original definition was used exclusively for seafaring transport, modern use of the term can be applied to all shipment modes of transit.
What does FOB mean in shipping and freight? ›
Free on board (FOB) definition
FOB origin, or FOB shipping, means the buyer takes responsibility at the point of origin of the freight. FOB destination means that the buyer only takes responsibility for freight once it reaches its destination, and the seller is liable for any damage.
Who Pays Freight for FOB Origin? If the terms include the phrase "FOB origin, freight collect," the buyer is responsible for freight charges. If the terms include "FOB origin, freight prepaid," the buyer assumes the responsibility for goods at the point of origin, but the seller pays the cost of shipping.
What does FOB mean in inventory? ›
FOB (Freight On Board) Destination is a shipping term that means that the legal title to the goods remains with the seller until the goods reach the location of the buyer.
Who pays for freight? ›
Ideally, the seller pays the freight charges to a major port or other shipping destination and the buyer pays the transport costs from the warehouse to his store or vendors. The determination of who will be charged the freight costs is usually indicated in the terms of sale.
Who pays for freight out? ›
Freight Out Explained
Freight out, or the cost of shipping goods to customers, is a significant expense that can significantly impact a business's profitability. It is an expense of the seller and is on the customer as part of the overall cost of the goods.
What are the benefits of FOB? ›
Most buyers choose FOB because it's arguably the most affordable or cost-effective option. Under the FOB terms, buyers do not usually pay the higher fees that CIF protection plans incur. With Free On Board, the buyer has more flexibility and control of the terms, the cost, freight planning, and more.
What are the 4 types of logistics? ›
The different types of logistics in supply chain management are mentioned below:
- Supply logistics.
- Distribution and Product Management.
- Sales logistics.
- Reverse logistics.
- Customer Service Management logistics.
There are five main objectives of the logistics management process:
- Minimize Manufacturing Costs.
- Efficient Flow of Operations.
- Better Communication Flow.
- Provides Competitive Edge.
- Better Inventory Management.
- Logistics Management Solution.
In CIF, the seller is responsible for transporting goods to the nearest port, loading the goods on the ship and paying freight for the goods to be delivered to a port chosen by the buyer. The seller is also responsible for paying insurance for the goods.
What is the responsibility of FOB shipper? ›
Under FOB shipping terms, the seller is responsible for all costs involved in the process up until the goods are on a vessel at the designated port. Once goods have been loaded onto the vessel the buyer is responsible for any costs and risks involved in the onward shipment.
How do you calculate FOB price? ›
FOB Value = Ex-Factory Price + Other Costs
(b) Other Costs in the calculation of the FOB value shall refer to the costs incurred in placing the goods in the ship for export, including but not limited to, domestic transport costs, storage and warehousing, port handling, brokerage fees, service charges, et cetera.
Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination.
What is the risk of FOB shipment? ›
FOB means risk of loss transfers when the shipment is loaded on the vessel. It does not mean anything else. For this reason, the language provided by the buyer simply did not make sense. In fact, there is NO shipping term that provides for transfer of risk of loss under these terms.
Can FOB be used for trucking? ›
FOB agreements are critically important to trucking companies. In large part, it's because the agreements determine who is responsible for payment and insurance at different points during the transfer.
What costs are included in FOB? ›
The costs associated with FOB include transportation of goods to the port, loading of goods, marine freight, insurance, unloading of goods at the destination port and transportation cost up to the final destination.
What is the process of FOB shipping? ›
Here is how the process of FOB shipping works: The seller and the buyer both decide the terms of the contract and modes of transportation. Once the terms of the FOB shipping contract are decided, the supplier will load the goods onto the vehicle and clears the goods for export to the port of destination.
Is FOB shipping cheaper? ›
Buyers generally consider FOB agreements to be cheaper and more cost-effective. That's because they have more control over choosing shippers and insurance limits. CIF contracts, on the other hand, can be more expensive. Since the seller has more control, they may opt for a preferred shipper who may be more costly.
Is FOB the same as delivered? ›
Destination” contract is a “delivered price” where the cost of transportation is “built in” to the price. On the other hand, the price of the goods specified in an “F.O.B. Origin” contract does not include a charge for transporting the goods from the seller to the buyer.
Do you include FOB in inventory? ›
Goods shipped F.O.B. destination are included in the purchaser's inventory while the goods are in transit. When the goods are shipped with terms of FOB destination, the inventory will be included in the seller's stock while the goods are in transit and till they don't reach the buyer's destination.
Who pays for shipping on FOB? ›
In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin. Once the goods are at the point of origin and on the transportation vessel, the buyer is financially responsible for costs to transport the goods such as customs, taxes, and fees.
Who pays for FOB destination? ›
FOB Destination, Freight Prepaid: The seller/shipper pays all the shipping costs until the cargo arrives at the buyer's store. The buyer does not pay any shipping costs.
The shipping term FOB means Free on Board. It is used in both domestic and international shipping. The FOB terms set out who is liable for the shipping cost and who will need to address any damages if the product is harmed during the shipping process.
Does FOB include shipping cost? ›
The FOB shipping point price does not generally include shipping, as that is typically paid by the seller. With a FOB destination point contract, the contract is a delivered price, with the transportation cost figured into the final contract.
How do you calculate FOB for shipping? ›
FOB Value = Ex-Factory Price + Other Costs
(b) Other Costs in the calculation of the FOB value shall refer to the costs incurred in placing the goods in the ship for export, including but not limited to, domestic transport costs, storage and warehousing, port handling, brokerage fees, service charges, et cetera.
