What Is FOB and What Does It Mean?
If you’re importing products from another country, how do you know who owns the goods while they’re in transit? At what point do the goods transfer from seller to buyer property? Who is responsible for damages, fees, and costs at the various points along transit? These questions of ownership and risk are what the term “FOB” resolves in international contracts between supplier and buyer.
What Is FOB?
FOB is an international commerce term (Incoterm) meaning “free on board” or “freight on board.” FOB helps determine when liability, risks, costs, and ownership of goods transfers from the seller to the buyer. It determines two key facets: 1) at what physical point the title of goods transfers and 2) who is responsible for transport costs and fees.
Why does this matter? FOB legally determines at what point responsibility is passed. What happens if your goods are damaged in transit? Who is responsible for handling the claims and insurance? Who owns the goods while they go through customs? The agreed-upon FOB settles any legal or communication concerns with regards to possession and liability.
Understanding FOB Terms
FOB can be found in four different ways:
• Origin, Freight Collect
• FOB Origin, Freight Prepaid
• FOB Destination, Freight Collect
• FOB Destination, Freight Prepaid
The first portion determines the point at which the buyer takes control of the title and risk of the goods: whether at the origin or the destination. FOB Origin is more common, where the buyer assumes ownership of the goods the moment that the freight carrier picks up and signs for the package. That means that the buyer is responsible for the goods during the entirety of its transit. In the cases of FOB Destination, the seller retains ownership of the goods until they are delivered to the buyer’s port.
The second portion indicates who will pay for the charges and fees related to the shipment of the goods. Prepaid means that the seller has paid the charges; Collect means that the buyer is responsible for all freight charges. Often, this will also determine who is liable for risk and insurance. Freight Collect is more common, where the buyer is responsible for all freight charges and assumes all risk for transport.
In some cases, the costs and risk will be divided between seller and buyer, as designated by the terms “Destination” and “Prepaid.”
However, overall, the most common FOB term is FOB Origin, Freight Collect. This means that the buyer immediately assumes ownership and liability when the seller loads the goods on the freight carrier. Basically, the seller can mark the goods as “complete” in their books and the buyer handles the rest. The buyer then pays delivery charges, insurance costs, customs fees, and more. The buyer is responsible for all potential damages (along with the insurance company and the freight hauler).
Why Choose FOB
FOB is generally the cheaper option for buyers and importers. Although FOB buyers have to pay the costs of freight, insurance, and unloading expenses, this usually is still less expensive than having to pay seller fees for other types of ownership transfer agreements, like CIF. FOB is generally a more competitive freight rate.
Moreover, FOB Origin gives more control to the buyer. Buyers have the ability to choose their own freight forwarder, so they have more access to information about their freight transport and timeline. They can also more easily track their packages and handle their own disputes with customs or freight carriers.
Sellers also like FOB because they don’t have to handle as many shipping concerns. If the items are damaged or lost during transit, the sellers hold no responsibility. The buyers must handle all of the claims and damages, assuming all related costs.
Note that a freight hauler or shipping company is still liable for any damage caused in transit. However, in the case of FOB Origin, the carrier would work solely with the buyer and the buyer’s insurance to settle any claims or disputes.
The Bottom Line
FOB is often recommended for buyers because it offers greater control at a lower price. In most cases of FOB, the process looks like this:
• The seller loads the good on the freight vessel of the buyer’s choice.
• The seller clears goods for export in their country.
• The freight hauler picks up and signs for the package, at which point the title of goods transfers to the buyer.
• The buyer is then responsible for insurance costs and risks associated with freight transport throughout the remaining duration of the transit.
Is FOB right for your importing business? Contact LTX Solutions now to discuss the best types of shipping contract and transfer of ownership for your imports.