What is FOB Shipping: The Definitive Guide

If you want to know if FOB Shipping is best incoterms for your importing business, then you can check what industry expert recommendations on best incoterms for buyers.

If you want to learn about the FOB shipping incoterm, then you just read this guide carefully.

If you are importing from China and want to get a quote on your shipping cost under FOB shipping, like FOB Shanghai, FOB Shenzhen, FOB Guangzhou, FOB Xiamen, etc, contact Tj chinafreight directly, we will give you all guide and best quote for your shipping.

If you want to know if FOB Shipping is best incoterms for your importing business, then you can check what industry expert recommendations on best incoterms for buyers.

If you want to learn about the FOB shipping incoterm, then you just read this guide carefully.

If you are importing from China and want to get a quote on your shipping cost under FOB shipping, like FOB Shanghai, FOB Shenzhen, FOB Guangzhou, FOB Xiamen, etc, contact Tj chinafreight directly, we will give you all guide and best quote for your shipping.

Ask for the Best Shipping Rate from China

Under FOB shipping terms, your supplier is responsible for all costs involved in the process up until the goods are on a vessel at the designated port. Once goods have been loaded onto the vessel, you are responsible for any costs and risks involved in the onward shipment.

Learn more about FOB:

What is Free On Board Shipping?

Freight or Free on Board is an incoterm developed by the International Chamber of Commerce.

 It shows the instant when the risks and costs of shipping cargo is transferred to the importer from the seller.

For example:

In present domestic shipping in North America, FOB shows the moment the supplier no longer bears the responsibility for the shipment.

That is, when the purchaser takes up the responsibility of paying the costs of transportation.

 Basically, FOB Shipping means that the supplier satisfies his responsibility to deliver the moment he or she loads the cargo on board at the port of departure.

This indicates that the buyer has to meet all costs and risk of damage or loss of the consignment from that phase.

What’s more?

The FOB term obligates the seller to do the export customs clearance of the goods.

Therefore, FOB agreement compels a seller to dispatch goods on board a ship designated by the buyer in compliance with the customs laws of the port of origin.

Further, the supplier must as well arrange for and meet the export clearance costs. Conversely, the buyer is responsible for:

• Sea freight transportation costs
• Bill of lading charges
• Insurance coverage
• Unloading
• Cost of transportation from the destination port to their warehouse.

The determination of the contract’s party who will be levied the freight costs is normally expressed in the terms of sale.

Of course, in the FOB shipping incoterm, there are specific terminologies we use.

You will learn more about them later in this guide.

Take for example:

When the contract is shown as “FOB delivered”, the supplier will be fully compelled to pay all the fees related to the shipping of the goods.

For “FOB Origin,” the importer has the responsibility of meeting the costs of transporting the cargo from the supplier’s store, to the final point of delivery.

You should note:

FOB does not spell out the ownership of the consignment.

The contract only expresses who is responsible for the cost of shipping.

To know the owner of the cargo, refer to the way-bill or bill of lading.

With that in mind, let me take you through a brief history of FOB.

History of FOB

The phrase “freight on board” has its origin back in the days of ships sailing when consignments were “passed over the rail by hand,” as described in Incoterm.

The phrase “FOB” was applied to refer to cargo hauled by ship, It is because marine transport was the leading method of transportation for goods from far nations.

The term’s application has changed over time and its description differs from one nation and territory to another.

In the 2010 amendment, the clause “passing the ship’s rail” was omitted from the Incoterm descriptions.

Since the introduction of Incoterm FCA in 1980, FOB has been considered mainly for non-containerized inland waterway and marine freight transport.

However, it is common to find people using FOB wrongly for all modes of transportation.

This is in spite of the contractual danger that it brings.

In some common law nations like the US, FOB is not only associated with the transportation of goods via sea.

However, it is also applied in inland transportation on board any vessel, motor car or any other motor vehicle.

That aside – let me walk you through some FOB terminologies.

Terminologies in FOB

Some add-on phrases may be added on the bill of lading, freight invoice, or other types of shipping paperwork.

The add-on terminologies may include, but not limited to the following:

i. Freight Terms

Determine the party with the responsibility of paying the freight and normally denoted as collect or prepaid with other several variations discussed within the article.

ii. Bill of Lading or Waybill

A legal agreement between the buyer and the seller.

This contract also acts as proof of the shipment.

iii. Prepaid

The term means that the consignor or seller assumes the responsibility of paying the freight.

iv. Collect

The term means that the buyer or consignee assumes the responsibility of paying the freight.

v. Prepaid/Collect Beyond

Means that the seller pays the prepayment part with the balance of the fee charged on the freight becoming the obligation of the buyer.

vi. Third Party

Indicates that a different partner who is neither the buyer nor the seller takes up the payment processing role.

The legal responsibility for the payment may or may not be on the third party.

And, the passing on of the legal obligation is dictated by the parties recognized in the Bill of Lading Agreement.

Here, the third party, bear no legal responsibility for the payment.

The “Third Party” term is normally put into use when the freight payment process is outsourced to another party.

vii. Pre-pay and Add

Usually means that the seller transfers the freight fees to the shipper.

And, then sends an invoice to the freight owner for an approximate or equal amount of the actual freight cost.

 viii. Terms of Purchase/Sale

Expresses the transfer of title and are commonly denoted as “FOB, designated place or point”.

In most simple and common instances, they are usually expressed as FOB Destination or FOB Origin.

ix. FOB Origin

This phrase shows that the title to the goods shifts to the buyer at the time and point of pick-up.

x. FOB Destination

The term shows that the title to the consignment is transferred to the buyer at the time and point of delivery.

xi. FOB Origin, Freight Prepaid

The term implies that the seller takes care of the consignment, shipping costs while the buyer bears the responsibility of the consignment at the place of origin.

xii. FOB Origin, Freight Collect

The importer meets the costs of freight and shipping and assumes total responsibility for the shipment.

xiii. FOB Origin, Freight Prepaid and Charged Back

Here, the supplier does not pay the shipping costs, but rather adds the costs of freight to the bill sent to the importer.

This indicates that the importer pays a more expensive bill.

It is because the costs of freight are incorporated on the final invoice.

In addition, the ownership and all liability for the goods are transferred to the buyer at the cargo’s point of origin.

xiv. FOB Destination, Freight Prepaid

The seller settles all the costs of shipping till the goods reach the buyer’s warehouse.

The buyer does not incur any costs for shipping.

xv. FOB Destination, Freight Collect

The buyer settles the cost of freight upon receiving the goods.

The buyer does not take up ownership or liability for the consignment until the goods arrive at his or her premises.

 xvi. FOB Destination, Freight Prepaid, & Charged Back

The supplier assumes liability for the freight till the goods are delivered to the buyer.

Also, the importer discounts the charges from the bill.

The original bill comprises the costs of freight originally paid by the supplier.

xvii. FOB Destination, Freight Collect, and Allowed

The seller adds the costs of freight to the bill and the buyer settles the costs.

The seller is liable for the goods until they are delivered to the buyer.

You should note the following:

The first section of the designation indicates where the purchaser presumes the risk of damage or loss and title for the cargo from the supplier.

It can either be at the time the transporter picks up the goods for delivery.

Alternatively, this can be the moment of real delivery.

The second section expresses who is responsible for the costs of freight.

Further, it is crucial for buyers and sellers to know FOB designations in case of damages.

Some receiving ports will decline delivery of the visibly damaged consignment.

Instead,they will accept receipt if a damage notation is attached for a later claim against the transporter.

Nonetheless, a shipment marked FOB Origin conceptually belongs to the consignee at the very moment it is on board a ship.

So, the buyer would be declining delivery of shipments he or she legally owns and takes responsibility for.

The consignor bears no legal responsibility to accept back those goods and the return shipment might probably attract extra damages.

Buyer’s Responsibility in FOB Shipping

You become responsible for all the mandatory fees and charges as soon as the merchandise is loaded onto a shipping vessel at their place of origin.

Of course, this is up to the arrival of the consignment at your final destination.

You take up responsibility once the consignment is in transit.

Types of FOB

In this section, I am going to walk you through various types of FOB.

With this information, it will be easier for you to read from the same script when dealing with your freight forwarder.

This way, you will settle for a deal that is fair for both of you.

Let me give you a practical example:

For instance, the majority of buyers say “FOB destination” when in real sense, they are asking for “FOB shipping” option.

It can be confusing if you’re new to the FOB shipping from China industry.

As explained earlier, FOB determines who will pay the shipping expenses.

However, the type of FOB indicates the contracting party who will bear the legal obligation for the consignment.

Besides, it determines at what stage when shipping from China the obligation shifts.

Generally, we have two main types of FOB:

 i. FOB destination and

ii. FOB shipping point

By choosing the right term, you will avoid possible service and destination hitches.

Of course, such delays will cost you both money and time.

FOB Shipping Point vs. FOB Destination

Let’s start with

a) FOB Shipping Point

FOB shipping point is the short form for “Free on Board Shipping Point.”

When the term is used in shipping, the goods are considered delivered immediately they depart from the seller’s shipping port.

Consequently, the buyer assumes responsibility and ownership of the goods from that point onwards.

Thus, in FOB shipping point, the buyer is responsible for the rest of the shipping expenses as soon as the supplier loads the consignment on board the carrying vessel.

Normally, the legal right of those commodities is passed on to the purchaser.

Thus, the supplier is not liable for the commodities during delivery.

Here is an example to help you understand what I am talking about here:

Suppose Company XYZ in the UK, orders, promotional products from its supplier in China, and enters a FOB shipping point contract.

Then it happens that the carrier damages the consignment in the process of delivery.

Here’s exactly what happens:

The company assumes total liability and cannot request reimbursement from the seller on the damaged goods.

The seller’s only obligation is to transport the promotional products to the carrier.

· How FOB Shipping Point Affects the Seller

FOB shipping point tends to be a popular term among sellers due to its sense of security in terms of payment.

The ordered goods cost the seller a great amount of money to manufacture and transport.

In fact, it will cost more particularly if they are shipping the consignment to a far destination.

Since it is not guaranteed that the buyer will pay for, once the ordered goods are delivered to them.

They pay for the order in advance.

FOB shipping point enables the seller to collect the sale, payment immediately the goods are loaded onto the ship.

It protects them from failed payments after having already spent their money to produce and transport the goods.

Like I said, here, the buyer is the one responsible for the cost of freight in FOB shipping point.

So, what does this imply to the supplier?

He/she can as well save money in case the products are damaged or lost while in transit.

In all these circumstances, it is upon the buyer to demand for reimbursement by filing a claim.

b) FOB Destination

FOB destination is a short form for “Free on Board Destination.”

The phrase expresses that the goods are considered delivered only after they have docked at the buyer’s port of destination.

The terms shift the entitlement of goods to the buyer from the seller when they are physically taken to the buyer.

FOB destination as well signifies that the seller covers the freight charges. This term establishes the shipment stipulations by:

 i. Mentioning the transaction party responsible for the delivery expenses

ii. Spelling out when the title is passed to the buyer

Consequently, with FOB destination, the right of ownership is normally shifted at the importer’s premises, loading dock or post office box.

Immediately after the products are delivered to the designated location by the buyer, the right of ownership of the products shifts to the buyer from the seller.

As a result, the supplier legally owns the products and is liable for the products during the transportation process.

Let me give you a practical example:

Assume Company ABC in U.K. purchases pharmaceuticals equipment from a Chinese supplier and it enters a FOB destination contract.

Presume the pharmaceutical equipment were certainly not delivered to Company ABC destination.

The seller takes full liability for the pharmaceutical equipment. He/she and must either reship the pharmaceutical equipment or reimburse Company ABC.

FOB destination has four variations, which comprise of:

• FOB destination, freight prepaid and allowed

The seller meets all the freight fees and possesses the shipment while they are being shipped.

The title of ownership is transferred at the buyer’s port.

• FOB destination, freight prepaid and added

The supplier pays the cost of freight, but invoices them to the buyer.

Normally, the ownership of the goods on transit remains with the seller.

Title shifts at the buyer’s destination port.

• FOB destination, freight collect

The importer pays the freight expenses when receiving the cargo, even though the seller still has the ownership of the consignment in transit.

• FOB destination, freight collect and allowed

The buyer takes care of the freight charges but subtracts the amount from the seller’s invoice.

However, the supplier still has ownership of the goods in transit.

Hence, the essential features of all the FOB destination variations are who is responsible for the freight payment.

Besides, the physical location at the time of transit when the title shifts is also important.

Since the seller is the party responsible for the cost of shipping the ordered item – what does it imply?

In case of damage or loss of products in transit, he or she ought to file a claim with the insurer.

Because the supplier is the owner of the goods at the moment when they were damaged or lost.

Now, here’s yet another side if this Incoterm you MUST know:

For accounting purposes, because the buyer presumes the ownership of the cargo at their port of receipt, the seller should also register a sale at that point.

Further, the buyer ought to register an increase in their inventory at the same place.

Why?

The buyer assumes the reward and risks of ownership, which happens at the place of arrival at their destination harbor.

In reality, the supplier will definitely register a sale immediately the shipment depart from their port of shipping, regardless of the delivery terms.

Therefore, the real effect of FOB destination is the determination of the party responsible for the freight expenses.

Still, a buyer may decide to by-pass the two the type of FOB terms by deciding to privately arrange for the transportation of the products.

The importer organizes how the goods are collected from the seller’s warehouse and take up responsibility for the consignment from that moment onwards.

In this arrangement, the purchaser should ensure that the supplier’s billing personnel know the new terms of delivery.

It is because the freight cost is not included in the seller’s final invoice.

A wise buyer should refrain from using FOB destination terms, but rather opt for FOB shipping point terms.

You’ll have better control of the shipping process.

Nevertheless, for an importer who is engaging with a supplier who is far away from them, here what you should do:

It is in your best interest to make the seller take responsibility for the goods, delivery as close to them as practically possible.

In the contrary, a seller negotiating with an overseas buyer should settle for the type of FOB that compels the buyer to assume responsibility.

Of course, it should include ownership of the cargo as soon as it is off your loading port.

I hope we are together up to that point.

Let’s explore the FOB incoterm.

Why it is FOB Important:

FOB incoterm determines the point where the risk of damage or loss shifts to the buyer from the seller.

The incoterm is vital to parties engaging in international trade and specifically for contracts entailing items that are delicate or susceptible to theft.

Our example shows the concept of FOB Destination since it is the standard and most popular FOB term.

However, other agreements such FOB Origin also apply.

It is where the buyer assumes liability and ownership at the time and location the goods come from.

For example, in the Chinese factory premises in our example.

Purchasers may select FOB Origin when they know they can source for a better contract during the transportation than their supplier.

It is essential, however, to note that the Uniform Commercial Code (UCC) usually presumes a trade agreement terms are FOB Origin.

That is, when there is no distinctive FOB language in a purchase contract.

Applying FOB shipping terms expresses that responsibilities, risks and costs are shared equally between the seller and buyer of merchandise.

FOB incoterm makes the seller responsible for all the expenses associated with your goods till they are loaded on a carrier at their port of origin.

FOB Shanghai, for instance, would indicate that the seller assumes all liability for the goods up to the moment they are loaded onto the shipping vessel at Shanghai.

Subsequently, the responsibility is passed down to you as the buyer after this point.

The FOB term usually includes a phrase referring to a port.

The referenced port is the dock from which the supplier will ship the cargo.

If, for instance, your seller provides “FOB Shanghai” terms, your responsibilities as far as the freight is concerned starts from Shanghai to your final point of destination.

However, it is needful to note that the port of origin must not be the nearest one to the supplier’s location.

It is because the fees and export licenses you may need for every port can vary.

The costs differ from one port to another, with other being more expensive compared to others.

Seller’s Responsibilities in FOB Shipping

When purchasing on FOB shipping terms, the seller’s roles and obligations extend extra further than just carrying the merchandise to the port of loading.

Since it is an issue that regularly comes up, we thought we clearly explained it.