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 arrive at the delivery location (typically the designated warehouse operated by the freight forwarder) and then the buyer takes on the responsibility upon the goods being 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 often used when shipping bulk cargo (not in a container) across the sea or using inland waterways. If you purchase products that will be shipped by sea in containers, FOB is also a common incoterm (although we recommend FCA as being a lower-risk option).
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. 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 is 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 allows buyers to enjoy that the vendor has to take some responsibility for the goods. At the same time, they’re being transported internally from factory to port (often to a designated warehouse operated by the freight forwarder). Also, it 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 stored at the place of delivery they are no longer their responsibility.
Why not choose FOB?
According to this blog post from shipping and freight resource FOB is commonly misunderstood:
Many customers still use FOB rules for containerized goods as well..
This is incorrect as containerized cargoes are delivered to a container terminal where it is received under the control of the carrier and not received on board the ship.. In this case, FCA would be the appropriate term to be used..
The incorrect usage of FOB in containerized cargoes has been and is quite prevalent across the world.. As a consequence of this incorrect usage, the seller is exposing themselves to unnecessary risks and costs..
This is because there is a gray area where neither the vendor nor buyer is responsible for the goods while they’re stored at the port and before they’re loaded onto the ship. While a problem is perhaps unlikely, if there were to be an accident that affected the cargo, it would result in quite a disagreement between the two parties, both of whom would feel they had a case to refuse the responsibility.
(Read more about FOB’s risks here: Beware FOB Shipping Terms)
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. There is also a small risk of loss when risk is transferred to be aware of.
Is there an alternative incoterm that could be used?
Generally, we suggest using FCA as an alternative to FOB. With FCA, the vendor packs and loads your goods securely and also completes the export requirements, leaving you in control of logistics (meaning you can negotiate the cost and use the carrier you prefer). However, liability transfers to you when the goods are delivered to the named place (using your carrier).
Some importers also 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?
Disclaimer
We are not lawyers. What we discussed above is based only on our understanding of legal requirements and regulations. Sofeast does not present this information as a basis for you to make decisions, and we do not accept any liability if you do so.
