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 Bansar 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 Bansar 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.

ICC

 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.

FOB

 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.

Evergreen

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.

Incoterms

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.

Shipping point – Photo courtesy: Simple Studies

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.

Polar air cargo

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.

FOB Destination – Photo courtesy: Simple Studies

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.

Port of Qingdao

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.

FOB Destination and Point

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.

FOB Shipping from China

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.

Cost of FOB Shipping

By now we understand that FOB is an incoterm that legally obligates the seller to do delivery of ordered items on board a ship to the buyer.

The supplier and the seller are legally required to honor their obligations pertaining the goods.

The charges relating to transportation of a cargo to the buyer’s premises from the supplier’s warehouse comprise of:

• Transport costs to the outbound port
• Costs of loading shipment onto the carrier vessel
• Sea freight transport charges
• Insurance coverage
• Cost of unloading the goods at the destination port and
• Cost of carrying the goods from the port of destination to the buyer’s store.

Buyer’s Cost

Under FOB origin, the standard FOB term unless stated otherwise, the buyer will cover all the above listed costs regarding transportation of the goods.

Here are the expenses you will be covering when shipping on FOB terms.

· Your Seller’s Invoice

Even though your supplier will assume responsibility for the bill on their side, it is vital to remember that, it is you the buyer who will pay for all the bills in the long run.

When the supplier sells to your merchandise on FOB terms, they will factor in their local shipping costs in your final invoice.

Though, you will not get any malicious hidden charges, so you are able to budget in advance.

Importing from China

· Freight Cost

When importing on FOB shipping terms, you will cover the cost of transporting your cargo to your location from the country of origin.

It does not matter whether it is by air or marine freight.

In order to go through this process hassle-free and successfully, it is advised you seek the services of a freight forwarding agent to manage the shipment on your behalf.

· Port Handling at Destination

The buyer will take up all the port handling fees at the destination harbor.

These include:

• Removing the container from the shipping vessel
• Unpacking the goods from the container in preparation for delivery

· Customs Clearance at Port of Destination

You will be compelled to declare your consignment with your customs department whenever you import goods to your country.

The declaration helps the customs officer to determine the amount you will pay in terms of duties and taxes.

These charges may be too big thus, doing a little inquiry on how much they will cost prior to shipping is important.

Delivery to final location

Voila! This is the final stage of the process.

You will cover the transportation cost from the port of destination to your final location.

Fortunately, some freight forwarding agents deliver up to your doorstep.

However, to avoid mishaps during delivery, you should specify how and when the delivery needs to be done.

Additionally, you the buyer also bears the risk of transporting the merchandise from the port of origin to your final destination.

Therefore, you must insure the goods while they are being transported to your destination.

When using FOB shipping term, all your costs are clearly spelt out to you before you enter into a contract.

Other Incoterms do not provide this advantage and this makes them quite difficult to efficiently budget for up front.

Incoterms 2010

Seller’s Cost

As explained throughout the article, applying FOB terms can be a simple method of importing products from China.

The FOB charges may vary slightly periodically, but ought to always be within a specific range.

Different types of shipping containers – Photo courtesy: Ship project cargo

Some costs are fixed and some are worked out on per “cubic metre’ (cbm) basis.

Below are the Free On Board costs that the seller will have to pay:

· Document fees

These include the costs to process all of the shipping documentation for your ordered goods.

· Entry Summary Declaration (ENS)

The fees paid by your seller when declaring the consignment to the carrier.

ENS must be remitted 5 days prior to the closing date.

Otherwise, your shipment will be forced to wait until the next ship destined to your specified port arrives.

· Terminal Handling Charge 

This is the fee charged for loading your merchandise at the port.

Your cargo will not even be packed into a container. Leave alone being loaded onto the shipping vessel in case the fee is not paid.

After your goods are packed into a container either by hand or forklift, they are loaded onto the shipping vessel using cranes.

· License Fee 

Your seller must have particular licenses in order to export goods.

In case the seller doesn’t have these licenses, they will pay a fee every time when exporting from China.

· Customs Clearance

When performing customs clearance of goods in the country of origin, your supplier will have to seek for the services of a customs clearance agent.

Customs clearance agent will charge for their services and any other procedures.

· Transport costs

The seller has the duty to transport your shipment to the outbound dock, but you now realize that it is not the only cost involved in shipping your goods.

· Telex Release 

Due to the technological advancement we are experiencing in the 21^st century, rarely will you get your shipping documentations via the post.

The most popular means to get them is through an electronic release.

Normally, electronic release is a charge billed to the seller. In order to receive the goods, the Bill of Lading must state that you are the owner of the goods.

Any other local charges

In some instances, the customs staff in the country of origin may want to inspect the consignment or may question something on the documentations.

If, for instance, your seller mistakenly makes an error when declaring the cargo, and customs ask for a re-submission, then the seller will equally have to cover the related charges.

The same applies in case of a customs inspection or if the goods have to be stored due to any reason.

Just to make you aware, in case you were purchasing on ex works terms, it would be your responsibility to pay all these charges.

Shipping charges will depend on your seller’s closeness to the port, though it is not guaranteed.

Therefore, if you want to cut costs, find a supplier that operates close to a major port.

Key Factors to Consider in FOB Shipping

A deal between a supplier to sell and transport goods to an importer can entail a lot of issues, including quantity, price and terms of payment.

Their contract may include mode of transporting cargo, and might indicate that the FOB term be applied to ship the consignment.

Therefore, let us explore the key factors to consider before signing up for FOB shipping contract.

When you are planning to consider FOB shipping term, there are crucial factors sellers and buyers should know.

They include:

i. Risks and Costs that come with FOB Shipping Point Term

The ICC laws spell out that FOB shipping point tasks the supplier to deliver goods by placing them on an outbound shipping vessel.

The seller covers the cost of placing the cargo into the shipping vessel and presumes the risk of damage or loss till that point.

As soon as the goods are put into possession of the carrier, the supplier ceases to bear the responsibility.

That is, for either cost of freight or the risk of damage, loss or theft.

ii. Type of FOB

Like I said, the buyer and seller will commit to FOB destination terms.

The charges and risk of loss regarding the consignment largely differ with those of FOB shipping point terms.

FOB destination mandates the supplier to meet the expenses and is liable of the risks of shipping from China to a specific destination.

The final destination can be the importer’s store or some other place.

But wherever it may be, the supplier still bears the charges and risks till the shipment is delivered to the designated destination.

iii. FOB Contract Details

On some occasions, more so with consignments transported over a long distance, the importer designates a specific shipping vessel.

It is where the supplier must deliver the cargo.

FOB vessel determines that the supplier shall do the goods delivery.

At the same time, he/she will be liable for the risks and expenses of doing so.

Of course, this is until the shipment is put onto the shipping vessel or any other transportation mode.

Maersk Line

Here is how an FOB vessel works:

The bill of lading or agreement between the seller and buyer includes details of a specific carrier.

Also, the buyer covers the freight charges as the supplier transports and loads the cargo.

Risk of damage or loss shifts to either the shipping company or the buyer.

However, the transfer of risk would rely on the agreement between the shipping company and the buyer.

FOB incoterm can have varying meanings based on how the key players apply the terms of the agreement.

Therefore, you should exercise caution when drafting the agreement in FOB shipping from China.

Advantages and Disadvantages of FOB Shipping

When shipping from China, it is important to consider deals where, payment terms, risk and passage favors them most.

It will help to:

 i. Minimize waiting time for end payment

ii. Ease management of cash flow and working capital

iii. Help in solving most shipping problems

iv. Reduce losses

I know you’d not want to hear this – but, it’s the truth.

Failure to plan is planning to fail, thus, it is in your best interest to practice due diligence.

Know the benefits and shortcomings of FOB shipping to you as a seller or buyer.

· Advantages to the Buyer

Some of the main advantages include:

• Ability to Keep Cost of Shipping Under Control

When importing from China on this incoterm, the buyer is better placed to control the freight charges.

This is because the hidden or unnecessary fees are easily detectable from the outset.

They can entail issues with export licenses (a likely problem with Ex Works) or handover fees (a possible scenario with CIF).

• All Overseas responsibilities and Obligation are with the Seller

Let me give you one example:

In case there is a customs inspection because of a wrong export declaration, the fee will be invoiced to the supplier instead of you being given the bill to pay.

Customs clearance

More experienced suppliers in China will provide Freight on Board terms as standard.

The buyer can request for FOB terms in case the seller has not offered it during transaction negotiations.

Take note:

Mostly, sellers will add an additional cost to the agreed sale value, when you request for shipping on FOB terms.

The extra charges show the seller’s increased costs, though it will not raise your overall cost of shipping.

Because it is only transferring some costs to the seller from you.

• Offers a Better Solution in Terms of Logistics

By hiring the services of a professional logistics or freight forwarding firm will give you a peace of mind.

Why?

You will probably cut on costs.

Besides, it will guarantee that the responsible party ships the consignment to final destination.

As a rule of thumb, as for quotes from different companies.

Also, research on the available transport terms.

From here, you can figure out alternatives, liabilities and risks.

In conclusion, Free on board is the best incoterm for bulk shipping of cargo from China.

It gives you total control and the supplier is tasked with the export customs clearance and paying the needed taxes and duties.

· Disadvantages to the Buyer

Immediately the cargo is on board the shipping vessel, the risks and cost are passed on to the buyer.

Shipping containers from China

It therefore indicates that, the importers will:

 i. Meet the costs of marine freight from the outbound port

ii. Take care of any other shipping expenses

iii. Do customs clearance at the port of destination

And since the risks shift to you once the goods are on board at the departure port, insurance coverage is of great importance.

Additionally, the importer suffers in the event of loss or damage of consignment on the shipping vessel in transit.

As soon as the vessel leaves the port of origin, whether it reaches the buyer destination port or not, he or she will bear the results of anything that happens.

· Advantages to the Seller

Some of the main advantages of FOB to the seller include the following:

• Seller is not given the responsibility of planning for the marine shipment and insurance coverage.
• Seller is able to recover the products before they are loaded onto the shipping vessel. This might be beneficial in case the buyer fails in payment or terminating the trade.
• Seller is not liable for anything in transit. It is because, the freight was placed under the control and ownership of the buyer immediately the consignment was loaded. In the event of damage, loss or theft, it is the buyer who files a claim, which can be quite a tiresome task.
• If goods are paid for using LC, the seller is not the one required to match the documents of shipping with the LC. The buyer does all the matching since it is them who issue the LC.

· Disadvantages to the Seller

On the other hand, below are some of the main disadvantages of FOB to the seller:

• Has to process all the export paperwork and meet all the associated costs, including terminal handling and customs clearance charges.

Shipping document

• Transport the shipment from the premises of operations until they are loaded onto the carrier vessel. The supplier also assumes liability for the goods till they get on board at the port of origin.
• Cannot claim any loss when the consignment is already loaded on the vessel.
• Cannot claim the charges in case the buyer made mistakes in designating an appropriate vessel. The ultimately makes the bill of lading to miss the set pricing period.

Free on Board often becomes hectic and tiring when filing for freight claim.

Since this is the moment when the transaction parties realize that FOB terms are overridden by the written terms of sale.

Case in point:

Where a purchasing contract or terms of sale is in effect, it will in most cases include a clause that indicates the party who bears the freight damage.

But, in the event a term of sale does not exist, the standard FOB terms will take effect.

Another problem arises when FOB shipping terms are applied where FCA terms was supposed to be used.

For example, when the goods are containerized or other modes of transport other than inland waterway or marine transport are used.

In these cases, free on board terms, does not apply to the transaction agreement and cannot be used.

For instance, to identify the party responsible for damage or loss if the cargo was transported by road or rail can be a problem.

It is because these are not modes of transport covered by FOB terms.

Comparison of FOB with other Incoterms

In this section, I am going to compare other Incoterms with FOB.

I will take you through a brief description, then to the advantages and disadvantages, where possible.

Even as you go through this section, I want you to remember this:

Incoterms is a collection of international rules and regulations that we use in international trade.

Depending on the circumstances, you are at liberty to choose any incoterm when shipping from China.

Always remember this:

It is crucial that sellers and buyers settle for terms that work for the benefit of their businesses.

That’s why you need to do an in-depth evaluation of each incoterm.

Having said that, let’s get to the main subject of this section:

Ø  FOB VS CIF

A popular headache when importing goods from overseas is the issue of the right shipping terms to apply.

CIF vs. FOB – Photo Courtesy: LTX Solutions

Cost, Insurance and Freight is equally a popular Incoterms that your seller may provide.

CIF is a shipping terms where your supplier takes up responsibility for the shipment till arrive at the destination port.

For example, in case you were shipping from China to USA, your supplier would assume responsibility for the merchandise till they reach the USA.

It is important to note that CIF has marine insurance cover included.

When using CIF shipping terms, the supplier’s invoice comprises:

• Cost of your goods
• Freight charge to get them
• Designated destination

Though CIF terms is applied successfully by most exporters, importers and shipping companies, it comes with its risks.

This is an issue that we have witnessed several times!

CIF terms greatest risk is that it seems to be so easy.

With FOB shipping terms, the buyer is completely aware that they are importing and is actively involved in the entire procedure

But with CIF, it seems almost as straightforward as regular shipping.

Your seller is liable for your cargo for the better part, so you will only be required to meet the customs fees and have the goods delivered from the dock – right?

Here’s something I want you to note – please DON’T be a victim.

New buyers shipping using CIF are usually caught off guard since they do not understand some of the vital stages in the importing procedure.

Lack of an EORI number is among such misfortunes commonly observed when importing.

Many first-time buyers do not know that some jurisdictions, such as the EU require an EORI number.

So, for you to import to the E.U., you need an EORI number.

When you’re shipping from China to U.K., and consignments reach their destination without EORI number, you’ll get stranded.

CIF – Photo Courtesy: Flamingo Group of Companies

These CIF terms may seem enticing as your seller may convince you that they can ship your merchandise to your destination port for less compared to FOB terms.

Unluckily, there is nothing for free in this planet (certainly never in the shipping world).

Obviously, you’re probably going to find huge hidden charges when the cargo arrives at your port.

FOB Advantages

• You are capable of controlling your costs from the supplier’s premises to your doorstep.
• No hidden costs.
• Your supplier ought to know the export documentation they require for their products.
• Majority of suppliers often work with FOB shipping terms

CIF Advantages

• Less costly shipping charges (until the goods arrive at the destination port)
• Relatively cheaper goods
• Can go well with full container loads in case you had transacted successfully before with the seller.

FOB Disadvantages

• Somehow raises the cost of goods.
• Seems to be a more costly shipping terms compared to CIF

CIF Disadvantages

• Possesses some hidden costs (handover charges, etc.)
• You may be charged Chinese import service fees. (CISF)
• You may experience problems at the customs department when you lack the right clearing requirements, for example, lack of EORI Number.
• Poor management of costs right from the beginning to end of the shipping process.

It is without any doubt that all the 13 shipping terms have their advantages and disadvantages.

Nonetheless, some Incoterms are best fit for specific types of shipment.

For new importers, it is recommended that all your costs are managed and clearly show from the onset.

Based on this fact, compared to CIF, FOB certainly provides better shipping terms.

Ø  FOB vs. CFR

CFR stands for Cost and Freight.

As per Incoterms 2010 rules, in CFR shipping terms just as in FOB terms, the supplier delivers the products to the buyer on board a designated vessel at the outbound port.

In addition, the seller arranges for the shipping of the consignments to the destination port and covers all the marine freight expenses.

However, under CFR terms, the seller has no legal obligations to provide marine insurance cover for the shipment.

CFR – Photo Courtesy: International Commercial Terms

· Differences between FOB and CFR shipping terms

From the descriptions of the two Incoterms, we note that they only differ in terms of the transaction party responsible for the shipping logistics and the freight expenses.

Shipping of Goods

• Under FOB Incoterms 2010, the buyer arranges for and transports the goods with their chosen freight forwarder or shipping line.
• Under CFR Incoterms 2010, the supplier arranges for and transports the goods with their selected freight forwarding agent or shipping company.

Freight Cost

• Incoterms 2010 rules compel the buyer under FOB shipping terms to pay the costs of freight needed to ferry the goods to the destination port from the port of origin.
• Incoterms 2010 rules compel the supplier to pay for the costs of freight required to ferry the goods to the port of destination from the port of loading.

Ø  FOB VS Ex Works

Another commonly used Incoterm is Ex Works shipping terms.

EXW

Under these terms, the buyer is giving the responsibility of all associated costs from the seller’s warehouse to the goods’ final destination.

ExW is the second most popular Incoterms among importers.

Because it clearly expresses your import cost, thus encouraging transparency and efficient cost management.

FOB and ExW shipping terms may both be applied to ensure you are aware of all your expenses during the whole shipping process until the goods arrive at your final destination.

ExW shipping term puts all the responsibility and risks regarding the goods to the importer.

Whereas, FOB shipping terms divide the responsibility equally between the two transacting parties.

We realize that both shipping terms have their benefits and shortcomings.

Clearly, the above comparison does not single out a winning term.

It is upon the buyer to decide on the best option!

Nevertheless, we usually recommend FOB shipping terms for first-time buyers importing from China via marine freight.

Why do we say so?

Both the supplier and buyer understand the roles and responsibilities from the start.

ExW may seem straightforward, but you may experience difficulties when negotiating with your seller concerning the actual export documentation.

You will require them to clear your cargo through your domestic customs.

Ø  FOB vs. FCA

The Incoterms FOB and FCA seem to be similar on the first glance.

However, exist subtle dissimilarities between the two shipping terms.

What is FCA?

Free to carrier, is suitable for containerized consignment.

Normally, the supplier’s responsibility is accomplished the moment the container is transported to the specified carrier.

Or, it is transported to the container terminal, which the importer selects, cleared for export.

The buyer takes up the risk or loss from this point onwards.

FCA

Any developing issue after the goods have been ferried to the CFS loading facility or export terminal, is then the burden of the buyer.

FCA implies that the supplier accomplishes their duty to deliver the products when they have submitted the shipments and cleared for export.

That is, the shipment is now in the hands of the carrier designated by the importer at the mentioned place.

If no definite point is designated by the importer, the supplier may select within the bounds of the place or stipulated range.

It is basically where the shipping line shall get the consignment into their control.

When, as per commercial customs, the supplier’s aid is needed in making the agreement with the carrier.

Take for example, in the case of air or rail transport.

The supplier may take action at the expense and risk of the importer.

FCA Incoterms can be applied in any mode of transport, encompassing multimodal transport.

Here, “Carrier” signifies any individual who, in an agreement of carriage, agrees to obtain or conduct carriage.

It can be by road, air, sea, inland waterway, rail, or by a blend of such modes.

At times, the buyer may direct the supplier to deliver the consignment to an individual.

For instance, a freight forwarding agent who by the operation is not a “carrier”.

The seller is assumed to have met their duty to deliver the cargo when they are in possession of that person.

BanSar China

In summary, immediately the supplier has taken the goods to the carrier assigned by the buyer, they are considered to have completed the delivery.

All the responsibilities, risks and costs are passed to the buyer from this point.

The importer will be tasked with the responsibility of:

 i. Arranging for and paying for transport costs

ii. Insurance and customs clearance at the arrival port

In FOB terms, the supplier is taken to have fulfilled the delivery once they have loaded the goods onto the shipping vessel.

And, the buyer assumes the risks and responsibilities for the shipments from that point.

The buyer further covers all the associated expenses in relation to the commodities.

The seller, under FOB terms, is only required to load the goods onto the ship and make sure that the consignment is cleared by the departure port customs department.

Securing cargo space in the vessel, cargo charges, insurance cover, among other expenses are the buyer’s responsibilities.

The importer ought to communicate to the supplier the details of the carrier vessel, date of delivery and any time limitations well in time before date of delivery.

Difference between FOB and FCA

• Mode of Transport

FCA can be applied in all modes of transport while FOB terms only apply to inland waterway and sea transport.

• Delivery by seller

With FCA, delivery is considered fulfilled provided the goods are placed in the hand of the carrier or transported to the mentioned places.

Under FOB terms, delivery is fulfilled as soon as the supplier loads the goods onto the vessel specified by the importer

• Transfer of risk

With FCA shipping terms, the risk of damage or loss of goods passes to the buyer once they are delivered to the carrier.

With FOB, risk shifts to the importer once commodities on board the vessel.

Responsibility for delivery

FCA terms makes the buyer liable for all the remaining stages after delivery by the seller, including arranging for the transportation to the final destination.

Free on Board gives the buyer total responsibility after:

• Goods are on board, including goods transportation to the final destination
• Obtaining the vessel for delivery, freight charges, and all related expenses

The supplier is only tasked to deliver and lift the goods onto the shipping vessel.

Summary of FOB vs. FCA

• Shipping on FCA terms are applicable to all modes of transport while FOB terms are only applicable to transportation of non-containerized cargo via inland waterway or sea.
• FCA shipping terms presume the cargo is delivered provided the supplier has handed them over to the carrier designated by the buyer. Shipping on FOB terms presume the commodities are delivered once they have been lifted onto the vessel.
• Both Incoterms mandate the buyer to arrange for transport, freight costs, insurance cover, and all other expenses during transportation.
• Risks shifts to the importer once the seller has placed the goods on the transport vessel for both FOB and FCA shipping terms.
• Both FOB and FCA require the supplier to arrange for export customs clearance.

Ø  FOB vs. DDP

Under Delivered Duty Paid, the supplier is liable for all expenses needed for customs clearance.

This is both at the port of destination and delivery of goods to a designated place of destination.

DDP – Photo Courtesy: TFG Finance LTD

The seller, in DDP, offers literally doorstep delivery, including clearing the goods both at the port of origin and the port of destination.

Hence the supplier bears all the related risks till the cargo reaches the importer’s premises.

DDP shipping terms give the seller maximum obligations and the buyer least possible obligations.

The seller has the responsibility of delivering the products to the designated location, in the country of the importer.

Besides, covering all the risks and expenses in transporting the consignment to the end destination, including import taxes and duties.

Risks are passed to the buyer from the seller the moment the goods are availed to the importer, ready to be unloaded from the carrying vessel.

Advantages to the buyer

• Reduced risk, as the supplier takes up all responsibilities and costs to the final destination. Nonetheless, the buyer is not entirely risk-free!
• The entire cost is known during purchase.
• No transportation management, arrangement of shipping or payment of such charges.

Disadvantages to the buyer

• Cannot be applied in the event the supplier is not in a position to acquire importation permits, licenses or particular payment alternatives with some customs departments. For instance, in shipping from China to Canada, GST taxes can be paid by registered businesses only so the seller may lack the means of making payment.
• Lack of control over the importation or transportation of the shipment.
• Lack of direct contact person to monitor a consignment apart from through your supplier.
• The buyer cannot contribute in case an issue arises.
• The seller may add extra hidden charges when calculating the import and shipping costs.

Here’s the point you should note:

There is a negligible advantage of one term over the other.

So long as the seller sets their product prices rightfully there is very little or no difference between FOB and DDP terms.

Let’s say DDP costs them higher so they should charge modestly more.

When the importing special or delicate products, then the supplier may decide to have total control during transportation.

For example, by employing the use of DDP terms or other shipping Incoterms that constitute shipping, to minimize emerging problems due to damage in transit.

Always be sure to countercheck proposed shipping terms for your transaction contract before entering a deal.

It is to ensure the deal is in line with your business goals.

Seek for specialist advice from your freight forwarder or customs broker, as in common cases, they can propose beneficial terms of sale.

When to choose FOB Shipping

FOB shipping is suitable if you’re shipping bulk cargo to your warehouse or distribution point.

This shipping incoterm provides the right balance between reward and risk for both seller and buyer.

Besides, among the many incoterms available, FOB is more clear-cut.

It minimizes the procedural confusion that is common in international shipping.

With FOB, you don’t have to worry about the nuances of shipping.

The term clearly defines who pays for what and when hence eliminating ambiguity in international shipping situations.

Still, on clarity, FOB is quite clear on who has control of goods and at what point.

As a result, both buyer and seller are aware of when and if they should process insurance in the event of freight loss or damage.

This clarity helps to minimize liability and save money during FOB shipping.

What is the FOB Shipping Process?

FOB shipping is a multi-stage process that begins at the seller’s factory/warehouse and ends at the buyer’s location.

And as you know, FOB shipping means that the seller is responsible for goods until they are loaded onto the shipping vessel.

Once on board, all risk and responsibility transfer to the buyer.

Hence, as the buyer, it is essential to know the stages it will take to get your goods from the origin.

Knowing the shipping process also helps you track your cargo’s progress as well as plan your delivery schedules accordingly.

Here is the FOB shipping process:

• Buyer purchases goods from a seller at chosen country, i.e., China. They choose FOB shipping and agree on the terms with the seller.
• At the seller’s location, your goods are packed and loaded onto a truck for inland transportation.
• The truck (or other means of transportation chosen) transports the goods to the loading port.
• Goods are loaded onto the cargo ship.
• Up to this point, everything is done at the seller’s risk and expense. But once the goods are on board the shipping vessel, all liability transfers from the seller to the buyer.

Note that in special situations (or as you agree with the seller), the buyer may bear expenses before the goods are loaded for shipping.

For instance, during consolidated shipping, goods must go through a container freight station to be consolidated into a shipping container.

Many sellers don’t pay for consolidation.

• After export clearance, goods are transported via sea or waterway to the FOB destination point.
• At origin, the buyer processes import clearance and pay for duty, taxes, and other port fees before bringing the goods to the final destination.

   Understanding the Difference Between Freight-In vs. Freight-Out in FOB shipping

During international shipping, freight charges accrue in varying amounts.

Shippers must correctly expense these charges to remain consistent with international shipping rules, regulations, and standards.

There are two main classifications of freight costs in FOB shipping, namely, Freight-In and Freight-Out.

Freight-In refers to when the buyer is responsible for delivery (FOB origin).

In this case, the buyer bears freight cost and also records it as Freight-In.

When the seller is responsible for delivery (FOB destination) and bears the shipping cost, it is considered Freight-Out.

For the seller, this cost is an operating expense and is reported on their income statement.

The differences between Freight-In and Freight-Out are quite clear.

Accounting principles require that sellers record an operating expense when they are responsible for it.

On the other hand, buyers may include the same expense in the cost of goods.

However, if the buyer does not include the goods in inventory, then they must expense the cost accordingly.

When negotiating the terms of sale, both parties must agree on their obligations.

They should ascertain who will be responsible for shipping.

Please note that Freight-In and Freight-Out during FOB shipping must be appropriately classified.

Otherwise, it may affect your business’ gross margin.

In FOB shipping, as well as other forms of international shipping, it is always important to consider how costs are expensed.

As a seller, you should always book charges as operating expenses.

On the other hand, a buyer should book these costs to the cost of goods sold (COGS).

That is if you include the goods in inventory.

Use of FOB in Shipping Documents

FOB (freight on board) is a significant incoterm in the freight industry.

Hence, it is often included in shipping documents to help determine the cost of goods and the dutiable amount of imported goods.

Remember that earlier in this guide; we had mentioned a few terminologies that you may come across during FOB shipping.

Some of these terms are also included in FOB shipping documents.

They include;

• FOB (place of origin)- Prepaid
• FOB (place of destination)- Prepaid
• FOB (place of origin)- Collect
• FOB (place of destination)- Collect

As a shipper (seller or buyer), it is essential to understand the FOB destination well especially in the event of loss or damage.

Some loading docks may refuse to ship damaged goods if the consignee refuses to accept the damaged goods notation.

However, when a FOB shipment is appropriately designated, the buyer or seller bears all risks. This is quite clear, and it helps to minimize confusion during FOB shipping.

Also, since 2010 the FOB incoterm definition has continuously been updated, making the sale agreement clear and understandable.

FOB Incoterm and Container Shipping

There is a lot of confusion in the industry when it comes to FOB shipping and container shipping.

Many shippers tend to misuse these terms, commonly interchanging one for the other.

Or not knowing if they can ship FOB using containers.

 Shipping Container

Well, a container is not an incoterm or shipping term.

It is simply a shipping container, a metal box in which goods are shipped.

These boxes are meant to be combined with other transport modes.

As such, it is preferable to use incoterms that are explicitly designed for container shipping.

Container shipping, note, is only possible with multimodal, non-exclusive incoterms.

So if you’re using a container, use other shipping terms such as FCA (Free-carrier).

These will help lower your freight costs and also minimize risks significantly.

Meaning of “FOB China”

In China, FOB is basically the default pricing for goods.

It includes the cost of producing goods, delivering the goods to the shipping port in China, and exporting clearance costs.

This price excludes local port fees, insurance, customs clearance fees as well as the costs of final delivery to your destination.

Usually, when shipping FOB from China, you will find the term “FOB” is followed by another word such as Shanghai or Shenzhen.

FOB Shanghai means that the seller will deliver the goods at the Shanghai seaport.

The FOB price hence includes the cost of shipping your goods to the port of Shanghai.

Note that China has many ports, including Shanghai, Shenzhen, Guangzhou, Ningbo, Qingdao, Xiamen, and Dalian, etc. 

So by default, Chinese sellers tend to use the nearest port, depending on their location.

However, if you want your goods delivered to a different port, you may request the seller to do so.

Remember, though, that the FOB price, in this case, may increase.

You may wonder why FOB pricing is most popularly used in China.

Well, Chinese suppliers hardly quote ex-factory prices, and the reason for this simple.

 Buyers don’t choose suppliers based only on their ability to produce well or cheaply.

Their choice is also often based on their ability to get the products to the shipping port efficiently.

A good example would be a factory in interior China with low labor costs but poor infrastructure.

The factory in question may be able to produce your goods at extremely low prices, say $2(ex-factory) but need an additional $1 to get the product “on-board” a ship to Kenya.

The total FOB cost, in this case, will be $3 FOB Kenya.

A factory in the metropolitan area of China with good infrastructure may have a higher factory cost say, $2.5 but still quote you a lower FOB China price of $2.45

Another reason for the popularity of FOB pricing in China is that traditionally, most goods were shipped by boat.

This is still the case, but with the addition of air freight and courier shipping, all thanks to the rise of e-commerce websites like Alibaba.

So should you ship FOB from China? Of course, especially if you’re shipping by sea.

FOB shipping is somewhat dependent on the volume and weight of goods you’re shipping.

So yes, sea freight is perfect for FOB shipping. Air cargo is also viable for FOB shipping.

Only this time, the seller will deliver the goods to an airport.

However, if you’re shipping a small volume of goods, consider shipping via courier and choose another incoterm such as EXW.

FOB vs. FAS

Unlike FOB, FAS (Free alongside Ship) is a specially designed incoterm for sea shipments.

When denoting the FAS incoterm, the shipping port’s name follows it as in “FAS Shanghai.”

Meaning, the seller will be responsible for the cost of shipping goods up to the origin port.

Once the goods are alongside the shipping vessel, the buyer takes control.

He/she caters to the export fees and clearance.

Unlike the FOB incoterm, the seller in FAS shipping is not responsible for the safety of goods during transportation to the shipping port.

Meaning of “FOB Cash” in FOB Shipping

As previously mentioned, FOB shipping applies to all transport methods, including sea, air, and rail.

When goods move from the loading dock to the first carrier (usually a trucking company), or between transportation methods, it travels FOB.

In this case, FOB Cash means that at some point, cash was paid for the shipment.

There are three types of cash payment in FOB shipping; cash in advance, cash with order, and cash against documents.

Cash in Advance (CIA)

Cash in Advance (CIA) refers to when the buyer pays for goods in cash before shipping.

It means that the sellers include the cost of shipping at the FOB price and pays for this expense from the buyer’s payment.

For this type of cash in FOB shipping, the bill of lading is not redeemable.

Toys

Put simply, if you order toys from China, the seller charges you for delivery as part of the FOB price.

You need to pay this amount upfront as the seller will use part of it to pay for shipping up to the origin port.

If you pay via credit card, the seller processes the payment prior to delivering the goods to the destination point.

Cash with Order (CWO)

Sometimes, buyers fail to issue a purchase order for goods but instead pay directly in cash at the time of purchase.

This type of cash payment is known as Cash with Order.

Like with Cash in Advance, the bill of lading for Cash with Order is also irredeemable.

Cash against Documents (CAD)

For CAD terms in FOB shipping, the seller ships the goods before the buyer pays for them.

However, the buyer can only claim the goods after making the agreed FOB amount.

The bill of lading for Cash against Documents (CAD) terms is redeemable.

These are the types of cash payment terms that you can use during FOB shipping.

Besides cash, there are many other ways to pay for goods when shipping on FOB terms.

Depending on the seller’s requirements, you can pay via PayPal, wire transfer, letter of credit, escrow, credit card, etc.

Remember to consult with the seller and agree on a suitable payment option for your FOB shipment.

Freight Documents and Customs Clearance in FOB Shipping

For FOB shipments, you need the following documents to ensure smooth shipping across international borders.

• Commercial invoice
• Export license
• Bill of Lading
• Packing list
• Insurance certificate

The above shipping documents are critical in ensuring safe shipping as well as a smooth customs clearance process.

In FOB shipping, the seller is responsible for all export clearance procedures and charges while the buyer takes care of Import clearance.

Conclusion

The use of FOB shipping terms can appear complex, though I can recommend it to avoid cultural differences and language barriers.

That is, from causing trouble and legal problems when assuming ownership and going through and paying costs of freight for international shipments.

Also, I know choosing the right incoterm, can be an overwhelming task when importing from China.

That’s why BanSar is here for you.

We will help you to choose the best incoterm when importing from China.

Talk to us today, and we will make your shipping from China easy and simple.