- October 24, 2024
- Posted by: admin
- Categories: Export Financing, Blog
FOB Incoterms, or “Free on Board Incoterms,” is one of the most commonly used international shipping terms, known as Incoterms, which were established by the International Chamber of Commerce (ICC). It defines the responsibilities of the buyer and seller when shipping goods by sea or inland waterways. FOB Incoterms is not applicable for air, rail, or road transport, making it specific to maritime and waterway transit.
The FOB Incoterms term lays out the distribution of risks, costs, and responsibilities between the buyer and seller during the transportation of goods. It is favored because it provides a clear split of obligations, making it a practical choice for both parties involved in the transaction.
What are FOB Incoterms (Free on Board Incoterms)?
Free on Board Incoterms (FOB Incoterms) refers to a set of terms that regulate the movement of goods from the seller to the buyer. Under FOB, the seller is responsible for the goods until they are loaded onto the ship at the designated port. Once the goods are loaded, the buyer takes over responsibility for transportation, risk, and insurance from the port to the final destination.
FOB terms can make trade smoother for both parties, as it clearly outlines the responsibilities each side has, thus reducing misunderstandings.
How FOB Incoterms Works: An Overview of the Process
- Point of Delivery: The FOB Incoterms terms define a delivery point, typically the port where the goods will be loaded onto a vessel.
- Seller’s Responsibilities: The seller is responsible for transporting the goods to the port, preparing them for shipment, and covering the costs associated with loading the goods onto the ship.
- Buyer’s Responsibilities: Once the goods are loaded onto the vessel, the buyer assumes all responsibilities, including risk, insurance, and transportation from the port to the final destination.
- Risk Transfer: The risk of damage or loss is transferred from the seller to the buyer once the goods are loaded on board the ship.
Seller’s Responsibilities Under FOB Incoterms
For the seller, FOB Incoterms terms involve several key responsibilities:
1. Warehouse and Storage
The seller is responsible for keeping the goods in their warehouse until the time of shipment. All costs related to maintaining the goods in the warehouse are borne by the seller. The warehouse is typically referred to as the “place of origin” in FOB Incoterms terms, and it’s where the contract between the buyer and seller was agreed upon.
2. Transportation to the Port
The seller handles inland transportation of the goods from the warehouse to the port of loading. This is where the seller’s role starts, ensuring that the goods arrive safely and on time for shipment.
3. Customs Clearance for Export
The seller is responsible for clearing the goods for export. This includes handling all the necessary customs paperwork, paying export duties, and ensuring the goods comply with the export regulations of the country of origin. The costs associated with customs clearance and export duties are also borne by the seller.
4. Freight and Loading Costs
The seller covers the costs of getting the goods from the warehouse to the port, which includes paying freight forwarders, handling terminal fees, and loading the goods onto the ship. All these expenses are part of the seller’s obligations under FOB Incoterms.
5. Insurance (Optional)
While the seller is not required to provide insurance, they may choose to assist the buyer in arranging insurance coverage for the goods during transit, up until the point of loading onto the vessel. This is usually done upon request by the buyer.
Buyer’s Responsibilities Under FOB Incoterms
The buyer’s responsibilities begin once the goods are loaded onto the ship:
1. Transportation from the Port
Once the goods are loaded onto the ship, the buyer is responsible for arranging transportation from the port of origin to the final destination. This includes paying for ocean freight, handling the unloading of goods at the destination port, and any subsequent inland transportation.
2. Customs Clearance for Import
The buyer is responsible for clearing the goods for import at the destination country. This involves preparing necessary documents for customs, paying import duties, and complying with local import regulations.
3. Freight Costs
The buyer covers all freight costs from the port of origin to the final destination, including the cost of marine transport, unloading, and inland delivery to their warehouse.
4. Insurance
The buyer must ensure the goods during transit from the point of loading at the port to the final destination. Insurance coverage helps manage the risk of damage or loss while the goods are in transit.
Key Terms and FAQs
1. What Does FOB Incoterms Mean in Export?
FOB Incoterms in export defines the responsibilities of the seller to cover all costs and handle transportation until the goods reach the agreed delivery port. From there, the buyer takes over.
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2. What is FOB Point?
The FOB point is the agreed location (usually the port) where the transfer of responsibility for the goods occurs. This is the moment when the buyer assumes responsibility for the goods.
3. Who Pays for FOB Incoterms Destination Freight?
Under FOB Incoterms terms, the buyer pays for all freight costs from the destination port onward. Once the goods are loaded on the ship, the buyer is responsible for paying the transportation costs to the final destination.
4. Which is Better: CIF or FOB?
It depends on the situation. In CIF (Cost, Insurance, and Freight), the seller has more responsibilities, as they arrange and pay for shipping and insurance to the buyer’s port. In FOB, the buyer assumes responsibility after the goods are loaded on the ship, giving them more control over the shipping process. If the buyer can negotiate better shipping rates, FOB might be more cost-effective.
5. Does FOB Incoterms Include Shipping?
Yes, FOB Incoterms includes the shipping process, but the seller’s responsibility only extends to loading the goods onto the ship. The buyer is responsible for all shipping costs and risks from the point of loading.
6. What is the Difference Between FOB Shipping and FOB Destination?
In FOB shipping, the buyer assumes responsibility for the goods once they are loaded on the ship. In FOB destination, the seller remains responsible until the goods reach their final destination.
7. Does FOB Mean Free Shipping?
No, FOB does not mean free shipping. The buyer is responsible for paying shipping costs from the point of loading onwards.
8. Can FOB Be Used for Air Freight?
No, FOB is specifically for maritime and inland waterway shipping. It cannot be used for air, rail, or road transportation.
9. How is FOB Value Calculated?
FOB value includes the cost of the goods, inland transportation, and the costs associated with export customs clearance and loading the goods onto the ship. For the buyer, the FOB value represents the price of the goods plus the additional freight, insurance, and import duties that are paid from the destination port onward.
Also Read: INCOTERMS or INTERNATIONAL COMMERCIAL TERMS – Everything You Need to Know