FOB (Free on Board) Shipping: FOB Shipping Point and FOB Destination [Guide in 2023]

FOB (Free on Board) is one of the Incoterms that is commonly used in international shipping and cross-border trade. Since the implementation of Incoterms, the freight shipping process has been eventually standardized. Incoterms describe when or where the responsibility for the goods transfers, so both the buyer and the seller will know at which point or stage they needs to become responsible for the goods. What does FOB (Free on Board) mean in Incoterm rules? What is FOB (Free on Board) shipping? Read on, and we will show you everything you needs to know about FOB so that you won't be confused about how the obligations and risks are distributed in the FOB agreement.

1. 1. Definition of Free on Board (FOB)
2. 2. The FOB Shipping Process: Understanding How FOB Works in Steps
3. 3. What is the FOB Shipping Point? [Explained in 2023]
4. 4. What is the FOB Destination? [Explained in 2023]
5. 5. FOB Shipping Point vs. FOB Destination: What is the Difference?
6. 6. FOB Pricing
7. 7. Freight Payment Terms: Freight Collect vs. Freight Prepaid
8. 8. Four Types of FOB Shipment Terms with Payment Terms
9. 9. FOB (Free on Board) vs. FAS (Free Alongside Ship)
10. 10. FOB (Free on Board) vs. CIF (Cost, Insurance, and Freight)
11. 11. FOB (Free on Board) vs. FCA (Free Carrier)

1. Definition of Free on Board (FOB)

Free on Board (FOB) is an Incoterm that defines the point when the responsibilities for the shipment and the ownership of the goods transfer between the seller and the buyer.

Literally, the FOB (Free on Board) term means that the seller will be free of all responsibilities the moment when the goods get on board the shipping vessel. And once the seller's responsibilities end there, the buyer is the one who becomes liable for the cargo. After the goods get on board in good condition, it is the buyer who should accept the ownership of the goods, take up responsibilities for the shipment, and be held accountable for risks like cargo loss or cargo damage.

2. The FOB Shipping Process: Understanding How FOB Works in Steps

Comprehending the detailed FOB shipping process can help the buyer arrange the whole supply chain in a more effective way. And here, we will show you how the FOB shipping process works in steps. Let's take a look at it.

1. 1. The buyer purchases products under the FOB shipping terms.
2. 2. The goods get picked, packed, and collected from a supplier's warehouse or a manufacturing warehouse.
3. 3. The goods are delivered from a warehouse to the port of origin.
4. 4. The goods get on board the vessel.
5. 5. The rest cargo's journey lies in the hands of the buyer, and the seller's responsibilities end when the goods are loaded on board.

3. What is the FOB Shipping Point? [Explained in 2023]

FOB shipping point, also known as FOB origin, means that the buyer will assume all responsibilities for the goods at the point of origin. As soon as the seller ships out the goods from the point of origin, it rests upon the buyer to hold the ownership, shoulder the obligations, and assume the risks. When cargo damage or cargo loss occurs during transit, the buyer will be held accountable for, which means the buyer has to file a claim when unexpected events happen.

4. What is the FOB Destination? [Explained in 2023]

FOB destination means that the buyer needs to take up responsibilities for the freight after it arrives at the destination. Before the goods are delivered to the place of destination, the seller has to retain ownership of the goods and be responsible for all risks. Once the goods reach the loading dock at the port of destination, it is the buyer who has to do such. Only when the shipment arrives in optimal condition is the sale considered complete officially.

5. FOB Shipping Point vs. FOB Destination: What is the Difference?

There are two types of FOB shipment terms used in international sale of contracts: FOB shipping point and FOB destination. As FOB shipment terms, FOB shipping point and FOB destination describe two different ways how the ownership of the goods and the liabilities for the goods transfer in the whole shipping process.

FOB Shipping Point and FOB Destination have defined different points where the ownership of the goods and the responsibilities for the goods shifts from the seller to the buyer. The FOB Shipping Point has made it clear that the buyer will assume the responsibility for the goods and have ownership of them as soon as the goods leave the point of origin. While the FOB Destination has set out that the buyer should hold the ownership of the goods and take up responsibilities for them once the goods reach the loading dock at the destination port.

6. FOB Pricing

What will be included in the FOB prices? Here let us have a look at it. When you ask for a FOB quote, the fees involved are displayed as follows:

1. 1. Costs of the goods
2. 2. Customs-related fees for export
3. 3. Documentation handling charges
4. 4. Costs of picking, packing, and delivering the goods to the port of origin
5. 5. Loading fees
6. 6. Cargo insurance fees

7. Freight Payment Terms: Freight Collect vs. Freight Prepaid

Which party pays for the shipping associated fees is what distinguishes Freight Collect from Freight Prepaid, the two payment terms. Freight Collect indicates that the buyer should cover the shipping costs. In contrast, Freight Prepaid means that it is the seller who will pay for the shipping process.

8. Four Types of FOB Shipment Terms with Payment Terms

There are four types of FOB shipment terms coupled with freight payment terms that are officially used in contracts and documents. It is advised that both parties figure out how they determine the distribution of responsibilities and allocation of costs, so the uncertainty and confusion will be taken away when taking the FOB shipping option.

• ● FOB Shipping Point, Freight Collect
• ● FOB Shipping Point, Freight Prepaid
• ● FOB Destination, Freight Collect
• ● FOB Destination, Freight Prepaid

The structure of FOB shipment terms in shipping documents and sale of contracts will be:

• ● FOB [place of origin] Freight Collect
• ● FOB [place of origin] Freight Prepaid
• ● FOB [place of destination] Freight Collect
• ● FOB [place of destination] Freight Prepaid

Typically, the place of origin will be the port of origin, and the place of destination will be the destination port.

The four types of FOB shipment terms combining with payment terms have stipulated the way of collecting freight charges in international transactions. It is made clear which party should cover what costs and which party should move to act when unanticipated events occur in transit.

FOB Shipping Point - Freight Prepaid

The seller should cover all transportation costs. The buyer will be responsible for all risks involved in the shipping process from the point of origin.

FOB Shipping Point - Freight Collect

The buyer needs to bear not only the transportation costs but also the responsibilities for the goods.

FOB Destination - Freight Prepaid

The seller has to pay for the whole shipping process. And the seller is responsible for the goods until they are delivered to the destination port.

FOB Destination - Freight Collect

The buyer needs to cover all shipping associated charges. And the buyer is responsible for the goods from the moment when the goods reach the loading dock at a named destination port.

9. FOB (Free on Board) vs. FAS (Free Alongside Ship)

FAS is one of the Incoterm rules that refers to Free Alongside Ship. When using the FAS (Free Alongside Ship) term, the seller will get the goods delivered to a barge or quay alongside a named shipping vessel. However, the FAS term does not require the seller to get the goods on board the shipping vessel. The seller needs to pay for the process of sending the FAS freight alongside the ship.

10. FOB (Free on Board) vs. CIF (Cost, Insurance, and Freight)

CIF is Cost, Insurance, and Freight, another Incoterm used in international transactions. In CIF (Cost, Insurance, and Freight), the seller should be responsible for purchasing insurance, handling the export process, and transporting the goods to a named port of destination. As long as the cargo is about to be unloaded at destination, the responsibilities will shift from the seller to the buyer. With CIF (Cost, Insurance, and Freight), the seller needs to pay for the cargo transportation costs, export-related fees, and insurance fees.

11. FOB (Free on Board) vs. FCA (Free Carrier)

FCA or Free Carrier is an Incoterm that defines the seller needs to deliver the goods to a specific carrier, or a location agreed upon by both parties in advance. And the buyer will take up responsibilities from there. In the FCA agreement, the seller is responsible for handling the export while the buyer is obligated to navigate the customs clearance for import.