What is Free On Board (FOB)?

Let Amplify Logistics clarify in detail. Present-day supply chains are not restricted by geographical locations. They stretch across the globe. Very few supply chains can exist in one geographic location without buying or selling raw materials or products from other nations. Needless to say, when it comes to international trade, traders have to comply with countless international laws that govern trade as well as cultural differences. All this may cause uncertainty, more so when it comes to interpreting contractual obligations and terms. Some of the most confusing terms are freight on board vs free on board. These are abbreviated as FOB.

The term FOB stands for ‘Freight on Board’ or ‘Free on Board.’ What does the term free on board FOB mean? Freight on board or free on board are terms used to indicate when ownership and liability of goods are transferred from the seller to the buyer. Free on board mainly indicates if the buyer or seller is liable for the goods that are destroyed or damaged during shipping. When FOB is used in an identified location, the designation helps identify the party that will be responsible for paying for freight charges, as well as the point title for the shipment will pass from the seller to the buyer.

When it comes to international shipping, FOB may refer to the name of the originating port. This means the consignor (seller) will be responsible for transporting goods to the port of the shipment and paying for the loading costs. On the other hand, the consignee (buyer) will pay the costs of insurance, ocean freight, unloading, and transportation costs from the port of arrival to the last destination. In this case of FOB shipping, the seller will pass the risk to the buyer once the goods get loaded at the originating port.

What is the difference between FOB and freight terms? To answer this question, you need to understand that in many cases, freight on board tends to be used in place of free on board. It is, however, vital to understand that this cannot be used as an official term. So, what exactly is Free on Board?

Understanding Free on Board

What is the meaning of FOB in the shipment? FOB is a term used for all types of shipping. This includes domestic and international shipping. Shipping contracts and orders describe the time as well as the place of delivery and payment, when risk shifts from the seller to the buyer, the party that pays the insurance and freight costs, and so on. It is the vendor-client transaction that defines the FOB terms in a purchase order.

FOB status doesn’t determine ownership but rather the party that takes responsibility for shipment at the point of origin or destination. Ownership is determined in the bill of sale or the agreement between the seller and buyer.

Each party involved must have a strong grasp of freight on board vs free on board. This is the key to guaranteeing a smooth transfer of goods from a vendor to a client. Keep in mind that regardless of whether the transfer is on a domestic or an international level, the FOB terms will impact shipping, insurance, and inventory costs.

Who Pays the Costs of FOB?

The costs linked with FOB may include the cost of transporting goods to a port for shipment, loading costs, insurance, freight transport, unloading costs, and transporting goods from the destination port to the final destination. So who really pays for all these costs? Is it the buyer, the seller, or both?

As a receiver, you may assume that the shipper is the one responsible for freight cost for FOB and bears the liability. The truth is that there are numerous shipping terms that may be agreed on between the seller and the buyer. The additional stipulations grant the ascertainment of who pays the freight costs and who owns the items, and its liability during shipping.

In general, using FOB destination will place ownership as well as the assumption of the risk on the FOB shipper while the item is in transit. The freight on board origin will place the responsibilities on the receiver. Simply put, using FOB destination means the shipper will be responsible for the product until it is received at the final destination. With the FOB origin, the responsibility of the product will fall on the receiver once the product has been loaded at the origin point. To get a better understanding of how FOB works in shipping, it is good to take a look at the differences between FOB origin versus FOB destination.

H3: FOB Origin

With FOB origin, the buyer gets the title for the ordered goods when the shipment starts. This means the responsibility of a seller will end as soon as the ordered item is placed with the shipment carrier. It is up to the buyer to make sure the goods get to them undamaged and on time.

H3: FOB Destination

With this option, the seller will retain their ownership of the ordered goods and be responsible for ensuring the items get to the buyer on time and undamaged. The ownership of the seller ends when the item gets to the final destination.

When it comes to international shipments, more so where a company orders a large inventory for global shipments on containers and vessels, the international contracts usually establish as well as outline provisions. This includes the place and time of delivery, terms of payment, and the FOB designation, which defines when the risk will shift from the seller to the buyer. The terms also outline who pays for insurance and freight.

Back to the question of who pays for freight cost for FOB – there are a couple of stipulations and factors that determine who pays. Who pays will depend on the types of FOB being used. The factors include the following terms:

Freight collect
Freight prepaid
Freight collect & allowed
Freight prepaid & chargeback

Using terms that define FOB must be included in the freight invoice. It can also be included in the bill of lading or any other documentation that is appropriate.

Basically, if the included terms use ‘FOB origin, freight collect,’ then the buyer will be responsible for paying the freight charges. On the other hand, if the included terms are ‘FOB origin, freight prepaid,’ the buyer will be the one to assume responsibility for the goods at the origin point. However, the seller will be the one paying the shipping costs.

Bottom Line

Using FOB can be somewhat confusing. It is, however, crucial to prevent cultural differences and language barriers from leading to legal issues and causing problems when paying and reviewing the costs of freight and taking possession of any international shipments.

What does the term free on board FOB mean? Hopefully, this post has answered the question. In summary, FOB is a shipment term used to define the point in a supply chain when a seller or buyer assumes responsibility for goods that are being transported. Terms like FOB origin and FOB destination are used to define risk, ownership, and costs of transportation for both the sellers and the buyers.

As a new FOB shipper, grasping FOB can be quite confusing. That is why more people outsource the whole process to a third-party logistics provider. Using an intermediary guarantees that the process is dealt with lawfully and according to the ICC conditions. Since liability and ownership can feature in tax payment, tariffs, and duties when shipping across international borders, you must use a third-party shipping company that has been in the business for years and has an impeccable track record in FOB shipping.

Amplify Logistics is North America’s logistics expert based in Toronto, Ontario. Get in touch today to find out more about their services. The support team is available 24/7.