Save Money in International Trade with FOB Shipping

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.

Use of FOB

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).

Costs of FOB

The costs of FOB shipping can be listed as follows.

  • Transport costs to the shipping port
  • The costs of loading goods on a transport ship
  • Sea freight shipping costs
  • Unloading costs
  • Insurance costs
  • Shipping costs of goods from the port of origin to the port of destination

FOB Shipping Categories

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.

FOB Origin

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.

  • Freight charge
  • Fees associated with transportation damages
  • Filing of insurance claims for damaged products
  • Control of the title and goods

FOB Destination

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.

  • The title and control of the goods
  • Freight charges
  • Keeping the product's worth, including completing insurance claims for any goods that were damaged during shipment
  • Choosing a carrier and a route

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.

Related Shipping Terms

Some shipping terms are used with FOB to clarify payment status and responsibilities.

  • Freight Prepaid and Allowed: In this category, the seller commits to cover all shipping costs. These costs are included in the pre-shipment payment.
  • Prepaid and Add: It means that the seller initially pays the freight charges. Moreover, the seller attaches an invoice for the buyer to reimburse.
  • Freight Collect: The buyer is responsible for all shipping costs.
  • Collect and Add: The buyer is responsible for freight costs, which are deducted from the invoice.
  • Prepaid: As the name suggests, prepaid means that the seller has paid the freight charges in advance.

Tax Compliance

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.

FOB Shipping vs. FOB Destination

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.

Advantages of FOB Shipping

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.

Risks of FOB Shipping

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.

Why Is FOB a Big Deal?

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.