Full Form of FOB – Freight on Board
The Full Form of FOB is Freight On Board. It is also known as free Onboard. FOB is a legal term that defines the point at which the risk and cost of the goods being shipped shifts from the selling party to the buying party. FOB is a law defined by ICC (international chamber of commerce) and accepted across the globe in modern days.
Whenever the goods and products are exported to a different country, there is a risk of goods being destroyed, damaged, or getting lost in international borders. The FOB defines the point till which the seller owns this risk and when the risk gets transferred to the buyer. Accordingly in the event of loss or damage, the cost is borne by the seller or the buyer. In other words, FOB is used to describe when the supplier of the shipment ends his responsibility for the goods being shipped to the buyer. Generally, the seller pays for the shipping cost to a major port or the shipping destination and the buyer pays for the transportation from the warehouse to his stores.
FOB’s origin goes back to the years when sailing ships were the main and only means of transportation for the goods across the countries. Back in those days goods were passed over the rail by hand and in the amendment of 2010, passing the ship’s manually by humans was excluded from the incoterm definitions of FOB.
Based on the point when the cost and risk (liability and responsibility) associated with goods transferred or shipped cargo, there are two types of FOB.
#1 – FOB Origin/Shipping Point
This means the transfer of liability and responsibility happens at the shipping dock of the seller itself. That is where the origin of trade of goods begins. When the goods are safely on board, the buyer is to bear the transportation expenses and liabilities during the shipment. This type of FOB is also referred to as the FOB shipping point sometimes.
Example – Shipment from Beijing to Los Angles is written in sales agreement as “FOB origin Beijing Jan 2020”.
#2 – FOB Destination
In this type of FOB Destination, the transfer happens only after the goods have reached its destination, which is then shipped cargo reaches the buyer’s store. The seller will bear all the transportation overheads and liabilities associated with transportation.
Example – Sales agreement is written as “FOB Destination Los Angles Jan 2020”.
Examples of FOBs in the Usage
- FOB shipping point freight prepaid by seller – Seller pays the cost and buyer owns the liability from the origin
- FOB shipping point freight collected by the buyer – The pays for the transport and owns responsibility from the origin of the shipment
- FOB shipping point and Freight prepaid by seller and charged back to the buyer – Seller doesn’t pay for the transport but charges the buyer with a premium invoice and sends it to the buyer to pay.
- FOB shipping destination, freight prepaid by the seller – Seller pays all the cost and the buyer owns responsibility only after receiving the shipment. The buyer will not pay any shipping costs.
- FOB shipping destination, freight collect from buyer – Buyer pays for the transport only at the time of delivery and takes responsibility only after the delivery of goods.
- FOB shipping destination, freight prepaid by seller and charged back – Seller bears responsibility till the delivery, the buyer deducts the cost from invoice.
- FOB shipping destination, freight collect by seller and allowed – Seller adds the cost to the invoice and the buyer pays the premium invoice but the seller owns responsibility till delivery.
FOB (Freight On Board) vs CIF (Cost, Insurance and Freight)
- Both FOB and CIF are international trade terms used during the buying and selling of cargo goods defined by the international border. Each definition is dynamic and will vary from country to country. It’s all about how the seller and buyer have negotiated the terms during the sale agreement.
- In CIF the cost of transport, insurance, and other charges are passed on to the seller of the goods. The buyer just takes ownership of the goods from his port or store and owns responsibility from that point.
- FOB is used widely across the export market globally whereas the CIF is usually used when the shipment involves any fragile, delicate or perishable goods. The risk involved in transporting goods safely to the destination is high. Hence it is advisable to ensure the goods and the cost is to be borne by the seller of the goods.
- Cost Insurance and Freight is also used in the case of the small seller/supplier. Buyer need not believe the seller’s authenticity due to his not to known reputation. In these cases to make the deal fruitful, the seller bears the cost and makes the sale agreement as per CIF incurring insurance and transportation cost.
- CIF is effective and useful if one is executing the deal from the seller’s perspective because the margins of profit will increase. The loss will be covered by the insurance which was already under place. FOB is effective and useful if the deal is being executed from the buyer’s perspective. Whereas, FOB saves the cost (transportation and other overheads) for the buyer and he just has to worry from the point of taking delivery in his warehouse or store directly.
FOB is the trade terms that usually comes into the picture in case of international trades. When the goods are being transported between countries, either of the parties (seller or the buyer) has to bear the cost involved in shipping. Someone also has to take responsibility and ownership of the goods at every point of the supply chain management (SCM). This is where the FOB comes into the picture. Both the parties define the FOB during the sale agreement by agreeing to certain terms.
FOB has mainly two types based on the expenses borne by either of the parties. Accordingly, the parties involved in the trade agreement on any one of the terms and execute the deal. In the case of a small seller who doesn’t have much reputation, CIF is used. The seller insures the goods and passes on the risk to the insurer. This can also be used if the shipped goods are fragile or perishable. FOB can be used in these scenarios also and is accepted globally with slight changes in the definition from country to country. Any party involved in the shipping of goods should and must define the type of FOB in their sale agreement to avoid the discrepancy and differences in the future of the deal.
This has been a guide to Full Form of FOB i.e Freight on Board and its definition. Here we discuss history, types of FOB along with examples and its differences from CIF. You may refer to the following articles to learn more about finance –