What does FOB shipping mean?
When shipping goods using sea freight, FOB shipping, or Free On Board, is one of the more popular incoterms used and indicates who bears responsibility for the goods while they’re in transit on the ship. FOB is actually an acronym and is short for “free on board.”
It also shows who’s paying for the freight charges (these may include sea freight costs, insurance, unloading, and ground transport from the destination port to your delivery address).
Typically the possession of the products passes to the buyer once they leave the factory on a truck, but the vendor retains responsibility for them until they’re loaded onto the ship.
If the products are lost, destroyed, or damaged during shipping, FOB indicates who’s responsible for them via the place of origin or place of destination annotation.
Note: FOB can also unofficially be used as the acronym for ‘freight on board.’ That’s a different meaning!
Who uses Free On Board shipping?
FOB terms are used when shipping bulk cargo (by container usually) across the sea or using inland waterways. If you purchase products that will be shipped by sea, FOB is probably the incoterm you will choose.
The difference between fob shipping point and fob destination
On shipping documents you’ll see a combination of the following:
FOB [shipping point/destination], Freight Collect/Prepaid
Here are the features of FOB destination and FOB shipping point and why how they’re used affects importers:
- FOB (shipping point) = the vendor of the goods (maybe your manufacturer in China) bears responsibility for them during transportation to the port and loading onto the ship. As soon as your goods are loaded onto the ship and your carrier signs the bill of lading the responsibility for them passes to you the buyer.
- FOB (destination)* = the vendor bears responsibility for the products during the sea transit, too, until they’re delivered to the destination port at which point it passes to the buyer.
- Freight collect = the buyer is responsible for paying freight charges and must also file claims in case of loss or damage.
- Freight Prepaid* = the vendor is responsible for paying freight charges and must file claims in case of loss or damage.
*Less common options
For example, one might purchase a container of textile products made in Dongguan under the “FOB Shenzhen, freight collect” terms. If “freight collect” is not mentioned, it is usually implied.
Note: A vendor is also known as the consignor and the buyer the consignee. Also, the shipping point may also be known as ‘place of origin.’
Example: Who pays for what if ‘Free On Board (shipping point) Freight Collect’ terms are used?
When place of origin/freight collect is commonly used, the vendor will pay for the elements required to get the goods loaded onto the ship. These include packaging for the goods (crates, boxes, dunnage, etc), loading onto the truck, internal delivery to the port, costs to export the goods (duties, taxes, etc), OTHC (Origin Terminal Handling Charges), and loading onto the ship at the port.
The buyer will pay the sea freight charges, freight insurance policy, costs to import the goods (taxes and duties), DTHC (Destination Terminal Handling Charges), delivery by truck or train within their country, and unloading at the destination once delivered.
Why choose FOB shipping?
The Free On Board shipping incoterm clearly outlines who is responsible for the products and when that responsibility crosses over from vendor to buyer. Buyers enjoy that the vendor has to take some responsibility for the goods while they’re being transported internally from factory to port, and it also allows them to control their own costs by negotiating a lower price for sea freight and insurance with their own choice of forwarder.
Vendors will also approve of FOB terms as they know that the sale is complete when the goods have left their factory and once they have been loaded onto the ship they are no longer their responsibility.
Note: We often recommend FOB shipping terms to Sofeast customers who’re shipping from China globally.
Why not choose FOB?
If you’re dropshipping EXW would be a better incoterm to purchase under because, unlike FOB, the vendor doesn’t arrange for all the goods to be exported. This allows the buyer to ship and export the goods as individual dropshipped consignments to customers as soon as orders come in.
Is there an alternative incoterm that could be used?
Yes, some importers choose to use the CIF (Cost, Insurance, and Freight) incoterm. This gets the same job done, but is generally more expensive than FOB. The vendor handles arranging and paying for the insurance and all shipping costs required to deliver the goods to the buyer’s designated port.
This might benefit inexperienced buyers or those that have little understanding of a certain country, but it’s often more expensive because the buyer doesn’t choose their own freight forwarder (and the vendor’s choice may be more expensive or they may even be being paid a kickback to choose a more expensive freight forwarder) and if the destination port charges extra fees (such as customs fees) then the buyer has to pay those, too.
Read more about FOB vs CIF here: Shipping under FOB vs CIF terms?