What is the meaning of FOB?

The definition is contained in Incoterm and means «freeboard» or «cargo on board». Although the two terms are used as synonyms and mean the same, it should be noted that “cargo on board” is not an official term but is used only colloquially. Once it has become clear what the abbreviation FOB stands for, it is time to find out and what it stands for.

FOB indicates the responsibility and ownership of the goods in international trade, and exactly when they are transferred from seller to buyer. The person who has made the commitment is responsible for any damaged or destroyed goods during transportation. Another important concept is the identified physical location, which indicates which party (buyer or seller) pays shipping fees and at what point the shipment becomes the buyer’s property.

The term is mainly used for goods transported by water as it is the main shipping method used in international trade. Probably due to the fact that it is sufficiently cost-effective and with the possibility of greater capacity of shipments. The FOB term is not known everywhere and has undergone many changes over the years. This is due to different variations in different countries based on the respective local jurisdiction.

What is FOB and FOB Delivery?

Some time ago, FOB was equivalent to shipping. Today, however, when you hear that word, it can be all kinds of transit freight. There is often a slight misconception about FOB deliveries, namely that they are free. In fact, this means that it eliminates the responsibility of one who has an obligation to take care of the goods during transportation. However, delivery costs remain available and are aggregated by the weight of goods, cubic feet (CBM), volume, distance (fuel), and more.

There is another concept around FOB and FOB delivery, namely the FOB delivery point. It is used when it reaches the point where the goods are already in the buyer’s hands. The delivery point indicates that ownership and all responsibility is transferred from seller to buyer. Sometimes an identified physical location is also used – shipping and other costs are already at the expense of the new owner of the goods.

What is a FOB Delivery Point?

The term FOB delivery point is widely used and used in international trade. It is accepted that by announcing the achievement of this point, the seller has fulfilled his duty – ie. hand over the goods to the buyer and he is solely responsible for their preservation and especially for the shipping costs. Please note that this destination is not when the transit consignment is already in the opposite shore country. The FOB delivery point is also considered to be the load on the vehicle that will be used for the transport.

In addition to the ownership and responsibility for the goods already taken by the buyer, the legal title of the goods is on it. In short, the seller has no commitment. It shall complete its task as soon as it transfers the goods to the carrier or the forwarding company. Then what happens along the supply chain until they reach the endpoint is the responsibility of the new owner of the goods.

FOB Origin vs. FOB Destination

FOB Origin and FOB Destination are two terms that are often misunderstood and confused to mean the same thing. To understand their nature individually, you will be explained and explained in detail. Here are the importance of two important concepts in the logistics industry and the main difference between them:

FOB Origin

FOB Origin is a common name in international trade. Such an indication is that the seller transfers ownership and responsibility to the buyer as soon as the goods are loaded onto the transport vehicle. Shipping fees to be paid to the freight forwarders or to the carrier company are the responsibility of the buyer. FOB origins sometimes look a little different – for example, after a name, a city name is described to make it clearer.

The so-called FOB origin is quite a relief for the seller, but not for the buyer.

FOB Destination

The FOB Destination has a slightly different policy regarding the transfer of responsibility and ownership of goods from one person to another. The buyer here has a much greater guarantee and peace of mind as he will only have to take care of the shipment when they are already with him. Shipping costs and any damages incurred are at the seller’s expense. FOB The destination poses a greater risk to the seller because it may suffer greater losses if something happens along the way with the goods.

FOB Delivery Termsin the Delivery Terms

When FOB (Free on Board) is indicated, then there are many other names that need to be checked to make sure they are listed. The documentation should be reviewed by a specialist because the ordinary buyer can be misled. Here are some of the basic terms that any international trade participant would be familiar with:

• FOB Origin, prepaid goods – the buyer assumes responsibility for the goods from the place of origin, and the freight forwarding company
• FOB Origin, freight collection – here the responsibility falls entirely on the buyer. It is charged with paying the shipping costs of the shipment as well as protecting its good
• FOB Origin, Prepaid and the Refunded Shipping seller does not pay the shipping costs, invoices the shipping costs that the buyer should receive. From this it becomes clear that the buyer pays a higher amount and also assumes full responsibility and ownership of the goods from the origin
• FOB Destination, prepaid goods – here is the opposite. The buyer pays nothing for the delivery at the expense of the seller, who assumes the financial part for the delivery and responsibility until the goods are delivered to the opposite party
• FOB Destination, Collecting goods – the buyer pays for all shipping and shipping costs after receiving the shipment of goods. Takes responsibility and ownership until the goods are delivered and removed to the appropriate premises for this
• FOB Destination, Prepaid and Refunded Fees – the seller assumes responsibility for the shipment until the goods are delivered. The original invoice also includes shipping costs, but subsequently deducted from it because they are paid by the seller
• FOB Destination, Pickup and clearance – the buyer pays the shipping fees while the seller is tasked with completing the delivery process – without causing damage to goods.

How is FOB used in transport documents?

Transport documentation is very important when moving consignments from one side to another. With such transportation it is good to have familiar persons with the term FOB in all its forms. Especially buyers in the event of damage to transport. International trade is very well developed today because there are enough competent people involved in the process, but there are times when things get out of hand.

In order to avoid such problems, it would be good to simply have the buyers a little more trained with the markings on the cargo board. This will be of great help to them in the case of delivery of damaged goods that can be refused acceptance by the docks, and rightly so.

As for shipping, there are some different ways in which the FOB term is used. The first, for example, determines where the buyer will take ownership and responsibility for the goods. The other indicates liability for the cost of transportation. When Collected is described, it means that the buyer has to pay the shipping costs. «Prepay» means that the seller is responsible for paying the shipping fees.

FOB accounting relevance

Accounting in international trade is much more rigorous and detailed. The main item here is the shipping costs, which should always be included in the invoice, along with the goods available. They are determined as soon as the buyer commits to the shipment of the goods as well as the property. All this should be reflected in the accounting program of the sender company.

The ability to account for the completion of the sales process depends on the FOB delivery point. For example, a deal is made when the carriers leave the dock to load the shipment – accounting here is a little bit more special. On the other hand, the accounting of the buyer should reflect that the shipment comes with inventory, which becomes an additional asset for the buyer’s company.

Benefits of FOB for Seller and Buyer

Incoterms

Incoterms are a familiar concept for most participants in international trade, but also unknown to many others. In fact, these are standards that require rules and guidelines. They are the main governing body of all forms of international sales.

The agreement between the different parties is most often through FOB – «free on board» or «cargo on board». On this basis, the responsibility for the buyer and the seller is determined. It is important that incoterms determine precisely this point of transfer of ownership and responsibility from the sender to the recipient.

Customs clearance

Sellers have big responsibilities that absolve buyers of certain responsibilities. For example, they must prepare the authorization of the goods of the expert docks. Prepare the export documents for the terminal or port, depending on the type of shipment.

Effective Delivery Conditions

FOB is one of the most common terms for international trade, so everyone should be aware of it. It is a great convenience and security for most participants in the delivery process. Offers really clear and effective conditions for shipping costs.

Disadvantages of FOB for Buyer and Seller

The fact is that FOB is a method that has proven to be relatively effective in terms of international trade. However, like any other thing, it has its drawbacks. Most importantly, the buyer may have to take great risks – in the event of damage, in the loss of goods, he may have to pay extra.