There are many different Incoterms to know, and some can feel confusing. For example, there are three that begin with the word, “Free,” but they’re not technically free! Rather, it describes what the buyer is responsible for in international trade, namely around imports and exports. There are similar differences between Free Alongside Ship (FAS) and Free Carrier (FCA). Here are the facts of what Free On Board really means, when to use it, its potential drawbacks, and how you can make it easier to leverage not only this but all Incoterms in the future.
What Does FOB Mean?
FOB, or Free On Board, is an Incoterm that stipulates the seller is responsible for delivering the goods on board a vessel designated by the buyer. This responsibility includes all costs and risks up to the point of loading the goods onto the ship. Once the goods have crossed the ship's rail at the specified port of loading, the risk and responsibility shift from the seller to the buyer. This clear distinction of responsibility makes FOB a preferred term for many international traders.
Of course, it's crucial to note that the use of FOB is restricted to goods transported by sea or inland waterway. This limitation underscores the term's relevance to traditional shipping routes and methods, distinguishing it from other Incoterms that might apply to various modes of transport, including air, rail, and road.
Furthermore, Free On Board names a specific place of loading, which is technically the place of delivery. Essentially, the seller is responsible for getting the goods to the place of delivery–on board the vessel. In so doing, the buyer loses control over the port and terminal or other preferences for transportation.
The choice of port can affect the cost, timing, and logistics of the shipment, making it a critical consideration for both parties in the negotiation process.
Did you know? The named place for using the Free On Board Incoterms rule is always the loading port.
The Drawbacks of Using Free On Board or FOB in International Trade
While FOB is a widely used Incoterm that clearly delineates the responsibilities of buyers and sellers in international trade, it is not without its drawbacks, especially for the buyer. Once the goods are loaded onto the vessel, the buyer assumes all risks and responsibilities, which can lead to several challenges, including the following:
- Risk of Damage or Loss -Once the goods are on board, any damage or loss during transit falls under the buyer's purview. This risk necessitates comprehensive insurance coverage, which can add to the overall cost of procurement.
- Shipping Delays - The buyer is responsible for any delays after loading the goods onto the ship. These delays can be due to weather, logistical issues, or port congestion, potentially leading to increased costs and missed deadlines.
- Customs and Compliance Issues - The buyer must handle all customs clearance processes for the destination country. Any issues with compliance, such as incorrect documentation or failure to meet import regulations, can result in delays, fines, or even confiscation of the goods.
- Transportation and Unloading Costs - After the goods are loaded onto the vessel, the buyer is responsible for all subsequent transportation costs, including unloading at the destination port. These costs vary widely and are subject to change based on external factors, making budgeting difficult.
- Liability for Environmental Regulations - In some jurisdictions, the importer (buyer) ensures that the goods meet all environmental regulations. Failure to comply can result in penalties, fines, and restrictions on future imports.
- Insurance Costs - While insurance is a prudent measure for any shipment, the buyer must specifically ensure that the coverage is adequate for the risks associated with sea transport under FOB terms. This often means higher premiums to cover potential losses during the voyage.
- Dependency on Seller's Shipping Choices - Although the buyer nominates the vessel, the initial loading process is controlled by the seller, who may choose a loading method or schedule that is not optimal for the buyer's needs or the cargo's safety.
Know When to Use FOB by Partnering With Crane Worldwide Logistics
With all incoterms, it is important to understand the obligations of both the buyer and seller. Eleven incoterms cover international shipments. Are you aware of all the different options? The Crane Worldwide Logistics team understands the variety and complexity of each possible Incoterm, and our team is here to help you choose the right one for every load.
Request a quote from Crane Worldwide Logistics to get started today.
With all incoterms it is important to understand the obligations of both the buyer and seller. There are eleven incoterms covering international shipments, are you aware of all the different options? If you need shipment support, please reach out to the team!
FREE DOWNLOAD: You can download our free Incoterms chart which providessimple explanations of all eleven incoterms here
More detail onIncoterms:
Click below for moreinformation on shipping terms:
FCA (Free Carrier)
CPT (Carriage Paid To)
CIP (Carriage and Insurance Paid To)
DAP (Delivered at Place)
DPU (Delivered at Place Unloaded)
DDP (Delivered Duty Paid)
FAS (Free Alongside Ship)
FOB (Free On Board)
CFR (Cost And Freight)
CIF (Cost, Insurance And Freight)
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