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What is Freight on Board: How does it work in shipping?
FOB or Freight on Board is a law term used to indicate the transfer of ownership of shipped goods from an exporter to an importer.
For domestic or international shipping, the term ‘FOB’ is often used in logistics documents. FOB or Freight on Board is a law term used to indicate the transfer of ownership of shipped goods from an exporter to an importer.
What is the meaning of FOB in shipping?
Freight on Board, known as Free on Board (FOB), is a term or phrase used to highlight when the ownership (cost and risk) of the shipped goods are transferred to the importer from the exporter. In simple words, FOB highlights the point in the export logistics process where exporter’s responsibility ends for the exported goods and the importer is expected to take over – both for the liability and costs involved. Usually, the exporter is expected to pay shipping charges until the goods reach a specified destination. Then, the importer is expected to pay freight from the port to his warehouse or vendors1.
Brief history of Freight on Board
According to incoterms, Freight on Board was introduced for seamless shipping across borders. The term’s usage has changed over the years and the understanding or definition also varies from country to country. Historically, FOB has been used to transfer liability and title between the exporter and the importer2.
Importance of Freight on Board (FOB)
Freight on Board (FOB) is crucial in international trade as it determines the point in the supply chain when a buyer or seller becomes liable for the products being transported3. It signifies the point at which the seller fulfills their obligation by delivering goods to the carrier at a specified location. FOB is vital as it impacts transportation costs, risk, and ownership. FOB terms are specified by the purchase orders between buyers and sellers.
Types of Freight on Board (FOB)
There are two types of FOB3:
FOB Origin
In this type, the importer pays for the costs of transporting goods from the exporter’s warehouse to the final destination.
FOB Delivered
In this type, the exporter handles shipping costs involved in sending goods to the final destination.
Conditions of using Freight on Board (FOB) in import-export transactions
The value of FOB is usually set by importers who have a fair idea about the costs involved in international trade. Importers have shipping agents at ports where goods are expected to arrive. The exporter is expected to send goods to the destined delivery port and then, it is considered that they have been delivered to the importer. The primary condition of using FOB in import-export is that the importer has an option to negotiate prices for freight services.
Cost associated with Freight on Board (FOB)
The cost associated with Freight on Board (FOB) includes various expenses, such as getting goods to the shipping port, loading them onto the ship, freight charges, insurance, and unloading and moving the goods from the arrival port to their final destination.
Different Freight on Board (FOB) terms you must know
Some of the popular FOB terms are:
FOB origin, freight prepaid
While an exporter is expected to pay shipping costs, the importer assumes responsibility for the origin of the goods.
FOB origin, freight collect
The importer pays for the shipping costs and handles the cargo responsibility.
FOB origin, freight prepaid and charged back
In this case, the exporter is not expected to pay shipping costs. They are added to the final invoice as freight costs and sent to the importer. The importer assumes responsibility for the origin of the goods and is expected to pay the freight cost bill.
FOB destination, freight prepaid
The exporter is in charge of the shipping costs till the cargo reaches the importer’s store. The importer is not expected to pay shipping costs.
FOB destination, freight collect
The importer is expected to pay shipping charges only after goods are delivered. Responsibility of the importer starts once goods reach the warehouse.
FOB destination, freight prepaid and charged back
Goods are the responsibility of the exporter. The importer sends the invoice and deducts shipping charges. The exporter has paid shipping charges as part of the original invoice.
FOB destination, freight collect and allowed
The exporter adds shipping charges to the invoice, and the importer is expected to pay. In this case, the exporter takes responsibility for the goods until they are delivered.
While you can choose to manage your own shipping via MFN, with Amazon partner carrier service, you can focus on your business expansion and goals while Amazon takes care of delivering your products to international customers.
While you can choose to manage your own shipping via MFN, with Amazon partner carrier service, you can focus on your business expansion and goals while Amazon takes care of delivering your products to international customers.
Freight on Board(FOB) vs Cost, Insurance, and Freight (CIF)
CIF and FOB are two key international shipping agreements for moving goods between importers and exporters. These terms are part of the Incoterms, a set of 11 terms created by the International Chamber of Commerce (ICC), widely used in global trade for defining responsibilities and costs in shipments. The comparative breakdown between CIF and FOB is:
Responsibility during transit:
CIF
Responsibility and costs remain with the seller until the goods are delivered to the importer.
FOB
Once goods are loaded onto the shipping vessel, responsibility and costs shift to the importer.
Preferred party perspective:
CIF
Often preferred by sellers as they maintain control and may have expertise in local customs, making it advantageous for the importer to accept.
FOB
Importers tend to favor FOB as they gain more control over choosing shippers and insurance limits.
Cost implications:
CIF
It can be more expensive for importers as sellers might choose more costly shippers and higher insurance limits.
FOB
Generally considered more cost-effective for importers due to increased control over shipping and insurance decisions.
Liability and risk management:
CIF
Sellers bear the risk until delivery, which might provide assurance to importers regarding the condition of goods upon arrival.
FOB
Importers assume risk once goods are loaded, granting them greater control over handling and potentially lower costs.
Customs expertise and access:
CIF
Sellers with local customs expertise might opt for CIF to facilitate the process for importers.
FOB
Importers with customs access or specific shipping needs might prefer FOB to exercise control over the process.
Both CIF and FOB have their advantages and drawbacks, depending on the specific needs, expertise, and preferences of the parties involved in the transaction. Factors such as cost, risk distribution, control over logistics, and expertise in customs play a significant role in choosing between the two shipping agreements.
FOB, or Free on Board, is a shipment term that defines the point in the supply chain when either the importer or seller takes charge of the transported goods. FOB terms are also explained well, which plays a significant role in the international trade process.
Both CIF and FOB have their advantages and drawbacks, depending on the specific needs, expertise, and preferences of the parties involved in the transaction. Factors such as cost, risk distribution, control over logistics, and expertise in customs play a significant role in choosing between the two shipping agreements.
FOB, or Free on Board, is a shipment term that defines the point in the supply chain when either the importer or seller takes charge of the transported goods. FOB terms are also explained well, which plays a significant role in the international trade process.
Fulfillment by Amazon (FBA): A seamless international shipping model
FBA enables Indian sellers to reach international customers and deliver their products across the globe in a hassle-free manner. When you choose FBA to ship your products, here’s what you get:
- Amazon stores your products in the Amazon fulfillment center.
- Amazon handles quick delivery to destinations across the globe with the Prime shipping option.
- Amazon offers 24/7 customer service
- Amazon FBA takes care of the returns
- Amazon FBA notifies you when you need to restock the products (if needed).
- Amazon stores your products in the Amazon fulfillment center.
- Amazon handles quick delivery to destinations across the globe with the Prime shipping option.
- Amazon offers 24/7 customer service
- Amazon FBA takes care of the returns
- Amazon FBA notifies you when you need to restock the products (if needed).
Amazon Global Selling: Easy e-commerce exports
With the growing demand for Indian products in international marketplaces, exporters and Indian sellers are keen to expand their businesses to the world. Amazon Global Selling is an e-commerce exports program that enables exporters and MSMEs to start and grow their export business in 200+ countries and territories. The exporter can simply register with the program in four simple steps and reach millions of customers shopping on 18+ Amazon international marketplaces.
More blogs on incoterms
Frequently Asked Questions
What is the FOB price?
Free on Board price (FOB price) is the market value of goods at the point of uniform valuation.
Does FOB include shipping?
Yes, FOB includes costs involved in shipping goods from one point to another.
Who pays for shipping in FOB?
Depending on the FOB option selected, either an importer or an exporter pays the shipping costs involved.
Does FOB include customs clearance?
No, customs clearance is the responsibility of the exporter.
What is the opposite of FOB shipping?
The opposite of FOB shipping is CIF.
Published on October 31, 2022.
Sources:
1. https://corporatefinanceinstitute.com/resources/knowledge/other/freight-on-board-fob/
2. https://www.freightquote.com/blog/what-does-fob-mean-in-freight-shipping/
3. https://www.investopedia.com/terms/f/fob.asp
4. https://www.liveabout.com/retail-shipping-terms-fob-2890156
5. https://www.tafs.com/what-does-freight-on-board-mean/
6. https://cleartax.in/s/fob-invoice
Sources:
1. https://corporatefinanceinstitute.com/resources/knowledge/other/freight-on-board-fob/
2. https://www.freightquote.com/blog/what-does-fob-mean-in-freight-shipping/
3. https://www.investopedia.com/terms/f/fob.asp
4. https://www.liveabout.com/retail-shipping-terms-fob-2890156
5. https://www.tafs.com/what-does-freight-on-board-mean/
6. https://cleartax.in/s/fob-invoice
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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
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