FOB is an International Commercial Term (Incoterm), a predefined commercial term meant to reduce confusion between sellers and buyers about ownership transfer points and responsibility for shipping costs. “Freight collect,” when it appears on your shipping documentation, signifies the buyer (the consignee) is responsible for paying for the cargo’s transportation costs from origin to destination. “Freight prepaid,” on the other hand, places this burden on the seller (the shipper).

FOB Shipping Meaning

This ambiguity means that it can be anything from a .pdf file to a blockchain record or another format yet to be developed. The seller will most likely require at least a mate’s receipt or some other form of evidence of export (such as a copy of the bill of lading) for their VAT/GST purposes. Receive news and insights that help you navigate supply chains, understand industry trends, and shape your logistics strategy.

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Therefore, understanding the implications of F.O.B. shipping point is crucial for effective supply chain management and successful business operations. Buyers and sellers often confuse FOB by understanding the shipment can be sent by any mode of transportation; this is not correct. The International Commerce Center (ICC), explains FOB is only viable for sea and inland waterway shipments.

What Does FOB Origin, Freight Collect Mean?

FOB status says who will take responsibility for a shipment from its port of origin to its destination port. It indicates the point at which the title of the goods transfers from the seller to the buyer, and therefore who needs to cover the costs of transit and deal with any issues. So, what responsibilities would a seller have today with respect to the shipping arrangements when the term of sale is F.O.B. Origin? However, it also entails drawbacks, including the potential for f.o.b. point disputes over transfer points, limited control over the shipping process, and inherent risks of loss or damage during transit. There is a reason FOB shipping is so popular amongst buyers and sellers; each party’s responsibilities give them the most control while the cargo is in their territory. The advantage for the buyer when purchasing under FOB Incoterms is they have the most control over the logistics and shipping costs, which allow them to choose their shipping methods.

At the same time, the buyer will record in its accounting system that inventory is on route. That inventory then becomes an asset in the buyer’s accounting books even though the shipment hasn’t yet arrived. FOB Destination means that the ownership of the products transfer from the seller to the buyer only when the goods arrive at the buyer’s location, in good condition. FOB Destination is more beneficial to the buyer, whereas FOB Shipping Point benefits the seller. For example, if a company was shipping its goods to New York City, it would be written out as FOB New York. FOB on an invoice stands for Free On Board or Freight On Board and refers to the point after which a business shipping products to a buyer is no longer responsible for the items.

FOB Destination Example

The qualifiers of FOB shipping point and destination are sometimes used to reduce or extend the responsibility of the supplier in an FOB shipping agreement. The term ‘free’ refers to the supplier’s obligation to deliver goods to a specific location, later to be transferred to a carrier. In addition, sellers are typically responsible for freight charges, which adds to their overall costs. To account for these expenses, sellers may need to increase the final price for the buyer. This can affect the seller’s competitiveness in the market, as buyers may opt for lower-priced alternatives.

However, if the seller wants to minimize risk and offer a complete service (including delivery), FOB Destination would be a better option. For FOB Origin, the buyer assumes all risks related to damage, destruction, and loss during transit once the goods are loaded onto the chosen mode of transport at the origin point. This arrangement can be more expensive for the buyer, particularly if the shipment is large or travels a long distance. Resolving any issues that arise during transportation can also be time-consuming for the buyer. FOB shipping point, or FOB origin, means the title and responsibility for goods transfer from the seller to the buyer once the goods are placed on a delivery vehicle.

Consider shipping costs

Assume the computers were never delivered to Company XYZ’s destination, for whatever reason. The supplier takes full responsibility for the computers and must reimburse Company XYZ or reship the computers. Recording the exact delivery time when goods arrive at the shipping point can be challenging. Constraints in the information system or delays in communication often cause a slight timing difference between the legal transfer of ownership and the accounting records. Free on board, also referred to as freight on board, only applies to shipments made via waterways and doesn’t apply to goods transported by vehicle or air. If you’re ordering many products from a single seller, you may have more leverage to negotiate FOB destination terms, as the cost of shipping per unit will likely be lower for the seller.

• What is FOB shipping, how does it differ from other incoterms, and when should you use it?
• For FOB Origin, after the goods are placed with a carrier for transport, the company records an increase in its inventory and the seller records the sale.
• When shipping goods to a customer, FOB shipping point or FOB destination may be two primary options, and it’s crucial to understand the implications for both the buyer and the seller regarding ownership, liability, and costs.
• As a small business owner, you want to make your own decisions, and with FOB shipping point, it’s a matter of finding the right balance between reward and risk.
• Shipping terms affect the buyer’s inventory cost because inventory costs include all costs to prepare the inventory for sale.
• The term FOB is also used in modern domestic shipping within North America to describe the point at which a seller is no longer responsible for shipping costs.
• If the buyer is responsible for the shipping costs and risk of loss, they may choose to delay the shipment until they have sufficient inventory space or until the market conditions are favorable.

However, the significant cost savings and control quickly outweigh this disadvantage. The answer is that the delivery point in the FOB Incoterms® 2020 rule is when the goods are delivered on board the vessel by the seller, and this is almost always impossible for the seller to do when the goods are containerised. Freight forwarders treat it as a way that they know the seller pays local charges in the export country, freight is marked as “collect” on the transport document and paid by the buyer. Often, their instruction forms to be completed and signed by the seller will only show three or four options, and FOB always features whether the goods are being transported by container or by air. At first glance, it might seem strange that both seller and buyer are responsible for pre-shipment inspections. To clarify, the seller is responsible if it is a requirement of the country of export, and the buyer is responsible if it is a requirement of the country of transit/import.

• To clarify, the seller is responsible if it is a requirement of the country of export, and the buyer is responsible if it is a requirement of the country of transit/import.
• Since it is the buyer who contracts for carriage, the “shipper” on the bill of lading should be the buyer, not the seller.
• Shipping costs are usually tied to FOB status, with shipping paid for by whichever party is responsible for transit.
• CIF is much more expensive for the buyer because they rely on the seller to include shipping in the price of their products.