Freight On Board Understanding How FOB Works in Shipping

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Posted on May 3rd, 2022

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One major perk of FOB is that buyers can negotiate freight services to secure the best prices. The supplier is only responsible for providing transportation of the goods sold to a designated main shipping origin point. This point is typically a port, since Incoterms are most commonly used for international trade where goods are transported by sea. FOB destination, on the other hand, transfers fob shipping point the ownership of the goods at the delivery point with the seller traditionally paying for the shipping expenses. Since the ownership of the goods doesn’t transfer to the buyer until the goods arrive at the delivery point, the risk of loss during transit is on the seller. FOB shipping point transfers the goods to the buyer at the point the goods are loaded into the truck or the shipping point.

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Indicating “FOB port” means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods are loaded on board at the port of shipment.

What Are Some of a Buyer’s Responsibilities in FOB Transactions?

• Oftentimes, in an FOB arrangement, the port at which the goods change hands is indicated.
• There are certain situations when CIF is the better option to use when shipping and receiving goods.
• However, because the seller takes on more risk and responsibility, CIF often comes with a higher cost.
• FOB shipping costs are important to a buyer because they affect their inventory costs.
• So, the inventory would be an asset in their books even though the goods hadn’t arrived yet.
• FOB shipping usually refers to goods shipped by waterways, although uses of the term can vary from country to country.
• The fitness equipment manufacturer is responsible for ensuring the goods are delivered to the point of origin.

The concept, outlined in the Incoterms list by the International Chamber of Commerce, streamlines shipping contracts and facilitates trade negotiations. FOB offers flexibility, cost savings, and clear allocation of responsibilities. In FOB Shipping Point agreements, buyers, due to their potential volume of shipments or pre-established relationships with freight carriers, might be able to negotiate more favorable shipping rates or conditions. Incoterms aim to simplify international trade by offering a standardized set of terms, reducing misunderstandings and disputes.

FOB Incoterms & More

Once the goods are at the shipping point, the ownership of the goods and the risk passes to the buyer and should be included in the inventory of the buyer as goods in transit. The buyer now has an obligation to pay for the goods and is responsible for all future expenses. Having decided that the terms of the contract are FOB, it is now necessary to choose the point at which responsibility passes from the seller to the buyer. The FOB point can either be the buyers destination, or the place from which the goods are shipped – the shipping point. With CIF, the seller handles all the documentation for exporting the goods, and the buyer takes over once it has reached its port.

How FOB Affects Shipping Costs and Responsibilities

Adding costs to the inventory means that the buyer doesn’t expense the costs right away, and this delay affects net income. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

Example of FOB Destination

Although FOB shipping point and FOB destination are among the most common terms, other agreements vary from these two. A variation on FOB shipping point is were the seller for convenience prepays the shipping cost and recovers this from the buyer at a later date. As the goods were sold FOB shipping point, the seller does not have to pay the freight cost and is now owed the 5,000 for the goods. Once the goods are at the buyers destination, the ownership of the goods and the risk passes to the buyer.

Final delivery

• Therefore, when the goods are being transported to the buyer, they are owned by the buyer and the buyer is responsible for the shipping costs.
• So, if you’re buying or selling globally, review the laws of the country you’re shipping from.
• Finance Strategists has an advertising relationship with some of the companies included on this website.
• Cost-wise, it means you pay for all transport costs, customs, and if anything happens after the seller loads them onto the ship.

FOB shipping point: Tips for buyers

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