Ever wondered why International trade is difficult to understand? While no two nations have the same regulations, specific rules are universal for freight. It implies that you will be subject to the same laws regardless of where you ship from. The International Commercial Term, or incoterm, is one of the most well-known examples of standardisation, and commercial invoices frequently include FOB.
On an invoice, FOB stands for "Free On Board" or "Freight On Board," and it refers to when the company shipping goods to a customer is no longer accountable for the goods. FOB refers to the term "free on board" in the context of international shipping. FOB is always followed by a mark that specifies when the seller's responsibility ceases. FOB Shipping Point or FOB Destination are examples of designations.
Did you know?
Incoterms were first published in 1936 by the International Chamber of Commerce. Incoterms 2021 is the latest iteration, with 11 terms, including FOB.
What Does the Term “Free on Board” (FOB) Mean?
The term "free on board" refers to whether the vendor or the customer is responsible for damaged or destroyed products during transportation. When a product is sold at "FOB shipping point" or "FOB origin," the customer assumes all risk after the seller sends the product. The buyer covers the shipping cost from the factory and is liable if the products are damaged in transit. The term "FOB destination" refers to the seller's risk of loss until the items are delivered to the buyer.
An incoterm is a conventional contract that specifies duty and accountability for products being sent. It defines how far along the process the supplier will ensure that your items are transferred and when the buyer will assume control of the shipment procedure. It also has an impact on your overall freight expenses. The responsibility for products sold during the transportation process is FOB. The initials FOB may be followed by the words "Destination" or "Shipping Point" and a specific city or place. The vocabulary used after "FOB" impacts its practical meaning, but it does not affect what the letters in the acronym stand for: free on board.
The term "free on board" is occasionally used interchangeably with "freight on board." However, this does not adequately reflect how it works in practice. If you see this designation on an invoice, the person or firm who provided the items to you was liable for them until the point on the invoice following "FOB." If your invoice reads "FOB Shipping Point," the seller or shipper was solely accountable for the items until they started shipping. The shipper was liable for the items until they reached you or your selected delivery destination if it reads "FOB Destination" or uses your address or city instead of "Destination."
Also Read: The Meaning of a Shipping Bill and Its Relevance in Customs Clearance
Getting to Know Free on Board (FOB): International Usage
FOB broadly applies to commodities delivered by ship, but the phrase has subsequently been broadened to encompass all modes of transportation. International transportation contracts sometimes include shortened trade phrases like delivery time and location, payment, when the risk of loss moves from the seller to the buyer, and who pays for freight and insurance.
The International Chamber of Commerce (ICC) produces Incoterms, the most prevalent international trade terminology. Because there are several sets of regulations, and legal definitions of FOB vary from nation to country, the parties to a contract must specify which set of rules will apply to a shipment.
Any vendor-client transaction should include FOB conditions in the purchase order since these terms decide who pays for shipping and insurance. However, it's important to note that FOB status does not indicate ownership; ownership is determined by the buyer and seller's bill of sale or agreement.
Usage of FOB in Real Life
In most circumstances, the term "responsibility for the products" refers to the expense of transportation. If your invoice says "FOB (your address)," the shipping expenses are already included in the price. It's possible that the vendor is footing the bill for shipping or that it was factored into the price as a cost to the customer. When receiving estimates rather than invoices, pay careful attention to the FOB designation. Check for a "FOB" in the shipping prices or total charges if you obtain an estimate on an item or service from different sellers. It indicates whether shipping to your final delivery location is included in the calculation.
FOB: An Overused Term
Because it pertains to outward-moving freight transactions, "FOB" should always represent free shipping for the individual receiving the items. It's a freight-in deal if the buyer accepts ownership of the items at the shipping point. According to Foreign Trade On-Line, FOB should only be used for water-based transportation. However, it is often used for ground-based transit.
FOB a Documentation Proof That Is Required
If you notice "FOB" on an invoice that came with your shipment, all shipping expenses have already been paid, and the word is just to let you know how your products were shipped. If you get an invoice before the seller ships the items, check the wording below the "FOB" mark to see who is responsible for the shipping expenses. If you have any queries, contact the seller to determine how that firm or individual defines the word.
FOB Shipping Procedure
- Suppose you purchase from a supplier in China and agree to FOB shipping conditions. The supplier is responsible for the subsequent three phases of the process.
- At the supplier's warehouse, your items are packed and put onto a truck (or another mode of transportation) (or another facility).
- The items are transported to the port by vehicle.
- The cargo is being put into the freight ship.
- Once your items are on board, the rest of the trip from China is now your responsibility and expense. You are responsible for everything that occurs beyond this point.
- You may be responsible for covering expenses before your products get on board in some cases.
- When transporting loose cargo (i.e., not a full container), your items must be consolidated into a container at a Container Freight Station (CFS).
- Suppliers do not always cover consolidation costs.
Free on Board: An Example
Consider the case of XYZ Clothing, which makes trousers and sells them to stores like Old Anchors. If XYZ sends ₹1,00,000 in denim from their Chennai factory to an Old Anchors shop in Dubai under the FOB shipping point (FOB Chennai) phrase, Old Anchors is responsible for any damage while the products are in transit and would insure the cargo. If the products are transported to the FOB destination (FOB Dubai), XYZ Clothing keeps the risk until the freight arrives at Old Anchors’s offices and the cargo is insured against damage.
Also Read: Bill of Lading – Meaning, Types, and Usage for Importers and Exporters
What’s the Deal With FOB?
The term "free on board" refers to transferring obligation products from a vendor to a customer.
What Does FOB Pricing Mean?
Transportation of products to the port of shipment, loading of goods onto the shipping vessel, freight transport, insurance, and unloading and transferring goods from the arrival port to the final destination are all expenditures involved with FOB.
Conclusion
- The phrase "free on board" (FOB) refers to who is responsible for damaged or destroyed items during transportation.
- When a product is sold "FOB origin," the customer assumes all risk after the seller sends the thing.
- The term "FOB destination" refers to the seller's risk of loss until the items are delivered to the buyer.
- The buyer's inventory cost is affected by the terms of FOB; increasing liability for shipping items raises inventory costs and lowers net profitability.
- Individual countries' legal definitions of FOB may differ.
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