free-on-board-fob

As an importer from China, are you aware of what does FOB mean?

Do you know how different incoterms can provide you different advantages?

As an importer, you have to know some common trade terms that are used internationally. This article will tell you all about one of the most important and commonly used international commerce terms: FOB.

It stands for Free on Board or Freight on Board. It basically tells you about the point during the whole export process at which responsibility and costs shift from seller to buyer.

You will know about the meaning of FOB in detail, when it is used, how it is used, advantages/ disadvantages, how to calculate the costs, the difference between FOB and other incoterms, and more. Read on to find out all about FOB, and how it will be useful for your business.

Table of Content

Chapter 1: The Basics of FOB Incoterm

Chapter 2: FOB Terms and Information You Should Know

Chapter 3: Advantages of Using FOB

Chapter 4: Disadvantages and Risks of Using FOB

Chapter 5: Costs in Using FOB

Chapter 6: FOB meaning Comparison with Other Incoterms

Chapter 7: Frequently Asked Questions about FOB

Chapter 1: The Basics of FOB Incoterm

basics-of-fob

FOB is one of the most important and common incoterms used worldwide. Here are some details about it that you need to be aware of.

1. What does FOB mean?

So what does FOB mean exactly? FOB stands for free on board, or freight on board. It is an international commerce term that divides the responsibility and costs between seller and buyer on the basis of location during the whole delivery process.

A specific location is chosen, usually the port in the seller’s country, before which all risks and responsibility is on the seller. After this point risk and responsibility shift to the buyer.

2. How does FOB work?

The seller and buyer decide on a specific point at which the shift of risk and responsibility takes place. This can be at the port of the seller’s country, the warehouse, or the port of the buyer’s country. The terms are decided mutually, and both parties agree on it.

how-does-fob-work

For example, suppose the buyer in the US and seller in China agree on the following terms: FOB Shanghai port. This means that the Chinese seller will be responsible for the costs and risk of the products during the following processes:

  • loading the cargo from the warehouse on the truck
  • delivery charges for the truck
  • unloading charges at the port
  • customs clearance at Shanghai port
  • loading charges at the Shanghai port
  • freight forwarder charges

During this whole process, if the goods are damaged or lost, the seller bears the risk.

After this point, all risks and responsibilities are on the buyer. The buyer in the US will pay for:

  • the sea freight shipping charges
  • unloading charges at a chosen US port
  • customs clearance at US port
  • loading onto truck and delivery to the warehouse

3. Should you use FOB or EXW, which is better?

EXW (ex-works) is another contact term for international shipping that means that the seller will make available the products for the buyer at a specific location, but the buyer has to pay the costs.

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For example, a seller in China will send your products to the Shanghai port or the US port, but you have to pay all the costs for the whole delivery process. The seller’s responsibility is only to package the goods, and provide documents for shipping.

As you can tell, this contract is beneficial for sellers only and not good for buyers because expenses and responsibility for buyers increase a lot. So it is better to use FOB rather than EXW if you are buying from a seller abroad.

Chapter 2: FOB Terms and Information You Should Know

Here are a few FOB terms that you should know about. They come up often during the contract negotiation, so the list of some FOB terms meanings is given for your information.

1. FOB destination

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Usually, the FOB point is the port of the seller’s country, but sometimes it can say FOB destination. This means that the seller is responsible for all costs, responsibilities, and charges for the cargo from the warehouse to the port of the buyer’s country.

At the port, the buyer takes responsibility for the goods. The destination can also be the buyer’s warehouse, so almost the entire costs are on the seller.

This can be especially good for buyers as they are free from costs and risks. Seller is responsible for any damage or loss to cargo throughout the shipping process until the cargo reaches the destination specified by the buyer.

2. FOB origin

In FOB origin or FOB shipping point, the seller only has to assume ownership until the cargo is packaged and sent out for delivery. So the responsibility of the buyer starts at the warehouse of the seller.

But costs and risk till delivery to port are still on the seller. So it is like the standard FOB, with the meaning of FOB as mentioned at the start. The only difference is the shift in ownership early on in the process.

3. FOB freight collect

FOB freight collect or FOB freight collect upon arrival means that buyer is responsible for the shipping costs and risks throughout the whole process. And for each contract, it is as follows:

  • FOB origin, freight collect: buyer takes ownership of the products as soon as they are picked by the carrier at the origin point.
  • FOB destination, freight collect: A seller retains ownership until the products reach the buyer at the destination point.

However, in cases, costs and risk is on the buyer.

4. Freight-in and freight-out shipping

When the seller ships or exports goods to the buyer using a freight company, and is responsible for the freight charges, then this type of shipping is considered as freight out.

FOB-freight-collect

On the other hand, when the buyer receives the freight, and is responsible for paying the charges or delivery costs, it is considered freight in shipping.

5. Documents required at customs

At the port of your country, you will need the following documents that are provided to you by the seller, after you pay for the goods and other factors:

  • Commercial invoice
  • Packing list
  • Packaging certificate
  • Bill of lading
  • Proforma Invoice
  • Certificates of Origin
  • Letter of Instruction

Chapter 3: Advantages of Using FOB

There are many contracts used for international shipping that divide the responsibility and costs between buyer and seller. Now that you know what FOB meaning is, here are a few reasons why using FOB incoterm is a good method for your business.

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1. The seller has more control over the freight forwarder

In the standard FOB contract, the seller has to arrange the freight forwarder in his country. This is convenient for both parties, as the seller has more information about good freight forwarders in his country. So he can arrange for reliable and trusted freight forwarders.

He also has more experience in doing this in his country, so there is less risk of fraud, damage, or loss to cargo. Hence both buyer and seller can be at ease with this arrangement.

2. Customs Declaration is done by the seller so the buyer is free of worries

Customs declaration at the seller’s country port is done by the seller. The seller is also responsible for sending the documents to the buyer for clearance at the destination port, so that clearance at the import point is hassle-free as well.

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This means that buyer is free of worries in this regard; there is no effort, time or money spent on customs clearance or customs brokers for the process.

3. Cost-effective method

Overall, the FOB contract is a very cost-effective method because each party is responsible for tasks in their home country so they can choose the companies wisely and save on costs. Both buyer and seller benefit from this approach.

For example, if the seller had to be responsible for hiring an inland delivery company in the buyer’s country for the delivery of cargo from the destination port to the buyer’s warehouse, he could make mistakes.

He could hire very expensive companies or potentially be a victim of fraud because of a lack of knowledge about the country’s companies. The same is the case for buyers in the seller’s country. Therefore, FOB works best for both.

4. Less risk for the buyer compared to EXW terms

In EXW, buyers have to be responsible for all costs and risks during the whole delivery process. It is a one-sided contract that mostly benefits the seller. But if you choose FOB, the risk and costs are equally divided, so neither party is at a disadvantage.

For example, if the buyer takes responsibility for shipping from the seller’s warehouse to the origin port, he has to pay extra costs and is responsible if the cargo gets damaged. EXW is not ideal for buyers but FOB is much better because of less risk.

Chapter 4: Disadvantages and Risks of Using FOB

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FOB is certainly a good contract for international shipping terms, but you need to know exactly what does FOB means for your business. So you should know about its disadvantages as well. Let’s look at some of these.

1. More responsibility for buyers

Once goods reach your destination port, you as the buyer have to assume all responsibility; you have to be liable for any damages, you have to pay for import duties, customs taxes, arrange for unloading and loading for inland delivery including the charges for all.

Hence, at this point you cannot avoid responsibility, so you have to prepare for the arrival of goods by hiring a delivery company, loading/unloading crew, and arrange for payment of taxes.

2. More risks for buyers after collecting the goods

More responsibility means more risk. From the destination port till reaching the warehouse, if the cargo gets lost or damaged, the buyer has to bear that risk.

For example, after your cargo has arrived at a US port, you’re transporting it to your warehouse, and if there is an accident that damages the cargo, you will face financial and material losses. This could result in setbacks and delays in business.

more-risks-for-buyers-after

3. Buyers still has to arrange documents for their own country customs

In your own country, you as the buyer have to get your cargo cleared through customs before you can transport it to your warehouse.

Some of the documents are sent by the seller such as an invoice, a list of goods, and a bill of lading, but you have to arrange for other documents yourself. These include tax certificates, tax numbers, registration or business licenses, etc.

If you’re new to this, you might have to hire a customs broker to do this for you. This means extra expenses and costs.

Chapter 5: Costs in Using FOB

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Below you will find a breakdown of the costs in the whole process of suing FOB contract. It also includes the division of costs between seller and buyer.

1. Cost-effective for both and no hidden costs

FOB contract is a very cost-effective method for both parties. Each party is responsible for tasks in their home country so they can choose which companies they hire and save on costs. Both buyer and seller benefit from this approach.

Furthermore, you will find that all costs are clear-cut and transparent. Both the seller and buyer know what they will be paying for. So you won’t find that an unexpected cost will show up at any point. Both parties just have to be careful about the damages to cargo, because that can be a big cost.

2. Costs covered by the seller

For the standard FOB contract, the port in the seller’s country is the point agreed upon by the seller and buyer. Till this point, the seller covers the costs for the following tasks:

  • Packaging the products in the warehouse
  • Loading the cargo from the warehouse on the delivery vehicle
  • Delivery charges for inland delivery from the warehouse to own port
  • Unloading cargo charges at the port
  • Customs clearance at own port
  • Freight forwarder charges
  • Loading charges for ocean carrier.

3. Costs covered by buyer

After the cargo is loaded onto the ocean carrier, all costs are on the buyer. From the original port to the warehouse of the buyer, the following costs are incurred:

  • The ocean carrier charges
  • Unloading charges at a destination port
  • Customs clearance charges at destination port: import taxes, customs fees, customs broker (if hired)
  • Loading onto inland delivery vehicle
  • Inland delivery charges
  • Unloading at the warehouse.

4. How to calculate the costs

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For both buyers and sellers, adding up the individual costs listed above will give you the total costs you have to pay. Factors that affect these costs include:

  • Weight and type of cargo
  • Distance from the origin to destination
  • Types of companies you hire
  • Amount of taxes and duties in either country
  • Cost of damages to cargo.

For example, if the distance between the two countries is very large, it will increase the freight charges, so the buyer will have to pay more.

Chapter 6: FOB meaning Comparison with Other Incoterms

Here are a few other incoterms you should know about, and how they compare to FOB.

1. FOB and EXW

EXW shipping means that the seller will deliver the products for the buyer at a specific location like the destination port, but the buyer has to pay all the costs.

FOB has a fixed point which is usually the port in the seller’s country. Costs and responsibility are divided between seller and buyer and shift from seller to buyer at the mentioned point.

fob-exw

2. FOB and FCA

FCA means free carrier; it is a trade term that requires the seller to deliver the goods to a warehouse, airport, shipping terminal, or another carrier location specified by the buyer.

But here the seller includes transportation costs in the total price, and assumes the risk until the carrier receives the goods. In FOB destination is fixed at the origin port.

3. FOB and FAS

fob-and-fas

FAS means free alongside. It is very similar to FOB. The only difference is the point of the shift from seller to buyer occurs when the goods are delivered by the seller alongside the carrier of choice at the port. While in FOB, cargo has to be placed onboard the carrier by the seller. So in FAS, loading on the carrier is the responsibility of the buyer.

4. FOB and CFR

CFR means costs and freight. Here seller has to cover the freight costs as well until it reaches the port in the buyer’s country. But in FOB, the seller is only responsible until the cargo is loaded onto the carrier at his country’s port.

5. FOB and CIF

CIF means costs, insurance, and freight. It is very similar to CFR. The only difference is that seller also assumes the risk of cargo by paying for maritime insurance. That means a seller has to pay for freight and insurance for shipping. While in FOB, neither of these is done by the seller.

6. FOB and CIP

CIP means carriage and insurance paid to. It means that the seller is responsible for freight and insurance for cargo until he delivers it to a specified location or middleman. After this, the buyer is responsible. In FOB there are no middlemen or middle destinations like this.

Chapter 7: Frequently Asked Questions about FOB

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1. What are FOB shipping terms?

FOB (free on board) shipping terms divide the responsibility between buyer and seller around a certain point during the shipment process. Costs and risks are shifted from seller to buyer at this point.

Terms can vary depending on FOB origin and FOB destination. Freight collection and freight prepaid are also factors that can change the shipping terms.

2. Who pays the freight on FOB?

It depends on the type of FOB contract you choose, but mostly it is the buyer who pays for the sea or ocean freight during the shipment process.

3. How is the FOB value calculated?

You can calculate costs by adding up the individual expenses. It depends on factors like the weight of cargo and distance of shipping and taxes.

4. What is FOB export?

FOB means free on board; it is a type of export when the exporter is only responsible for the goods till they are loaded onto the ocean carrier. The rest of the responsibility lies on the importer.

5. Which one is better CIF or FOB?

FOB is better for sellers because of the less risk and costs involved. But CIF can be better for buyers as sellers have to pay for insurance and freight.

Conclusion

FOB is one of the most important incoterms that you will hear often in your business. This article covered all important aspects of FOB: its meaning, key terms, advantages and disadvantages, calculation of costs, and comparison with other terms.

So now that you know the meaning of FOB, it is time to put it to use by incorporating it into your business transactions. It can make the whole process easier whether you’re importing from China or anywhere else.