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Shipping forms the backbone of trade. It is of great importance for all the importers and exporters of the world. Every stage should work flawlessly. The products should be delivered from one point to another without any damage. Especially maritime transport has a significant share in world trade today. If you are going to do business in this field, it is useful to know some terms. One of these terms is Free on Board (FOB).
Free on Board shipping is one of the delivery methods used only in the maritime transportation industry. FOB indicates all the responsibility of the firm or person who will supply the goods until they carry the goods to the deck of the ship to which they are to be transported. FOB shipping refers to the transfer of responsibility and ownership of goods from a seller to a buyer. It's used to eliminate misunderstandings between sellers and buyers concerning ownership transfer points and shipping charges.
FOB shipping is the seller's way of delivering the goods after they are loaded on the designated ship at the designated port. In this term, the seller must have completed all export customs procedures for the goods.
When a shipment is designated as FOB, the seller considers the transaction complete as soon as the goods leave their warehouse. The buyer is responsible for the delivery fees. They own the goods in transit to their warehouse.
FOB is only used in a limited number of international and domestic shipping settings. It is used by companies that ship goods internationally by rivers, canals, and sea freight. The use of FOB for road freight is prohibited by the International Chamber of Commerce (ICC).
The costs of FOB shipping can be listed as follows.
FOB is divided into two groups because the items must be insured by either the buyer or the seller at each stage of the shipping process.
If an order is "FOB origin", ownership goes to the buyer the moment it leaves the seller. If transportation is needed to bring the goods to the buyer, the buyer must contract for it and pay for it.
The buyer is responsible for the following when the order is FOB origin.
In "FOB destination", when items are delivered to the buyer, the buyer takes ownership. The seller is in charge of organizing and paying for the buyer's shipping. On the other hand, the seller can claim these costs from the buyer. The seller is also liable for any damage that occurs while the item is being transported to the buyer.
A FOB destination shipper has the following responsibilities.
To summarize, in FOB destination, the shipper must pay for the freight charges, while in FOB origin, the receiver is responsible. But companies can make changes to the contract as needed. There may also be differences in payment terms.
Some shipping terms are used with FOB to clarify payment status and responsibilities.
If you're in a place that charges sales tax on shipping, FOB will be beneficial for you. For FOB origin cargoes, the buyer usually contracts with the sender. They pay the freight costs directly to you. Places, where freight charges are paid directly, are exempt from sales tax. Thus, the buyer will generally not have to pay sales tax on shipping costs.
There are two differences between the FOB shipping point and FOB destination. The party paying the shipping costs and the time of transfer of ownership from the seller to the buyer separate these two terms.
Under the FOB shipping point, it is the buyer who pays the shipping cost. The buyer becomes the owner after shipment.
In the FOB destination, the seller pays the shipping costs. Also, unlike the shipping point, the seller retains ownership until delivery.
FOB shipping is frequently chosen since it is the most cost-effective option. Buyers generally do not pay large costs under FOB contracts. They also have more flexibility and control over terms, cost, freight forwarding planning, and other factors.
If you buy goods with FOB from another country, you are responsible for the risks and costs of transportation from the moment goods are loaded onto a ship. As goods are loaded, you are liable for any loss, damage, or additional expenditures.
Consequently, FOB is essential for determining who is liable for a shipment's safe delivery. It's also a way to find out who owns the items during the shipping process. It is also useful for accountants, who can record the time a transaction happens depending on the FOB location of delivery.
You may want to keep costs down by making your own shipping arrangements with FOB. But you have to make sure that you can cover the responsibility if something goes wrong.
Letter of credit payment is a commonly used payment method in the financial world. Today, this method is frequently preferred in foreign trade. In international trade, insecurity may arise if the importer and exporter do not know each other very well. The exporter wants to collect the price of the products he sells. On the other hand, the importer aims to receive the goods on time. This is where the letter of credit comes into play.
This method is a type of payment that provides assurance to both parties. Thus, communication difficulties due to different time zones and long distances are eliminated. In the letter of credit, the payment is secured by the bank. You can safely use a letter of credit in your foreign trade transactions. If you have questions about the letter of credit, you will find the answers you are looking for in this article.
A letter of credit is a contract in which the foreign buyer's bank undertakes to pay after the exporter sends the goods and submits the necessary documents to the exporter's bank as proof. Banks or other financial institutions mediate letters of credit transactions.
Exporters and importers are protected by letters of credit. They can assist you in gaining new business in overseas markets. This means that the exporter is guaranteed payment while the importer is given the proper payment conditions.
Let's say you are an importer. If you use a letter of credit, you can only pay for goods after the supplier has proven that the goods have been shipped. You also do not need to pay any advances or deposits to the exporter. So, you can protect your cash flow as well. Moreover, a letter of credit shows your creditworthiness. Therefore, it provides instant credibility for you.
For exporters, on the other hand, a letter of credit is like insurance. If the price of the goods sent by the exporter has not been paid by the buyer, the letter of credit payment works like insurance. In such a case, the financial institution will cover the amount. Therefore, a letter of credit is like a shield against legal risks. Because as long as the exporter meets the delivery conditions, his payment is guaranteed. Letter of credit provides another important advantage to exporters. It can be shown as collateral in working capital loans for exporters.
The beneficiary is an exporter. In other words, it is the party that supplies or sells the goods.
The applicant is the buyer. It is the party that requests the bank to create a letter of credit.
The issuing bank is the bank that creates the letter of credit upon the request of the buyer.
The advising bank is located in the exporter's country and notifies the exporter of the letter of credit.
The International Chamber of Commerce's (ICC) UCP 600 and ISBP 745 regulations have determined how letters of credit will work. ISBP 745 gives certain details and implementing directives, while UCP 600 outlines the rules.
The payment is made by the issuing bank to the beneficiary or to the bank he designates. The beneficiary may give the right to draw to another entity if the letter of credit is transferable. Banks charge a fee for the service, which is a percentage of the size of the letter of credit.
There is no predetermined charge for this service. The fees will be determined by the bank you use. A percentage of the amount covered by the letter of credit is likely to be collected. This fee normally does not exceed a few percentage points. However, it varies depending on factors like your credit history.
In the case of a revocable letter of credit, the buyer or the issuing bank may change or cancel the letter without formal notice.
An irrevocable letter of credit is the opposite of a revocable letter of credit. It cannot be canceled or altered in any way unless the buyer, seller, and issuing bank have an explicit agreement.
The exporter has a payment guarantee from a second bank or confirming bank in a confirmed letter of credit.
Only the issuing bank can guarantee an unconfirmed letter of credit. An unconfirmed letter of credit is a common type, but in areas of economic distress and political uncertainty, payment may be at risk.
This type is a letter of credit that allows the primary beneficiary to transfer the credit to another party. Thus, in this type, a second beneficiary arises.
A limited engagement clause is included in this sort of letter of credit. The issuing bank agrees to pay the beneficiary upon submission of the required documents at its own counters or at its own counters of the named bank, according to the clause.
Only one authorized bank can be used for negotiations in this category. As a result, the issuing bank's ability to pay the beneficiary is restricted to a single, specified bank.
Unlike the restricted letter of payment, in this type, the bank is not specified. As a result, the beneficiary's chosen bank can be used to negotiate the letter of credit.
The usance letter of credit may delay the payment by allowing time for the buyer to inspect or sell the goods.
A sight letter of credit is a document confirming payment for goods and services. Payment can be made when this document is presented along with the required documents.
In short, if you want to get a letter of credit, you need to contact your bank. Not every institution has a letter of credit opportunity, but the bank you contact may also direct you to other institutions. You should present the necessary information to the bank in detail. Then the bank will explain whether it considers you suitable for the letter of credit.