FOB Price and FOB Incoterms® (Free on Board)
What is the FOB Incoterm®?
“Free On Board”, or FOB, occurs when the seller delivers the goods to the port of shipment, at which then it becomes the responsibility of the buyer once unloaded onto a vessel. If the goods are damaged when on board the vessel, it’s the responsibility of the buyer.
FOB Price Explained
To understand FOB pricing, one must understand what FOB means. FOB is the short form term for Free On Board (or Freight on Board) and roughly translates to mean that the cost of product being delivered to the nearest port is included in the purchase price, but the purchaser is liable to pay the shipping costs from that port. This is along with all other fees for the onward journey to the port of the buyer’s destination. It is clearly understood when this shipping term is used, that the supplier will pay for the product cost and inland delivery costs from their factory to the port. This will not include costs in relation to onward shipping fees. FOB Price FOB is best understood by contrasting it with other shipping terms. As discussed above, when purchasing FOB the buyer will pay for the transport. In contrast to this many contracts are EXW (Ex-Works) or ExFactory cost. Therefore, it is just the cost of the product that is paid by the buyer; which includes no transportation or customs costs in the fee paid.
What’s the Difference?
Often the best way to fully understand a concept is to see its counterparts. As previously mentioned, when purchasing with FOB the buyer will pay for the transport. In contrast to this many contracts are EXW (Ex-Works) or Ex-Factory cost, or CIF/ CF:
- EXW = Pricing method in which the seller is required to make their product ready for collection at their place of business – any other transportation costs related to the buyer having the product in their hands are a liability of the buyer.
- CIF = Cost, Insurance, and Freight. The price of a contract which includes insurance and sea freight fees to the nearest port.
- CF = Cost and Freight. The price of a contract which includes sea freight costs but no insurance on the goods.
FOB Pricing Process:
- Suppose company X manufactures clothes and sells them to retail stores such as Topman or RiverIsland, If company X ships £10,000 worth of clothes to Topman under FOB shipping method, Company X is responsible for getting the goods safely to their port. After that, Topman would be liable.
FOB: What are the critical issues?
The risks of loss or damage pass to the Buyer once the goods are successfully loaded on board the vessel.
FOB rule requires the Seller to fulfill export customs formalities, if necessary.
In case of transport with goods stuffed into containers, good are generally delivered at the Sellers’s site, therefore it is advised to use FCA rule.
Which one is for you?
While all three have their benefits and disadvantages, it really depends on your business and your approach to trade. For instance, if you are relatively new to overseas trade, perhaps FOB would be more helpful, as all the costs are upfront which would help your budgeting, also it is fairly simple for yourself.
If you are considering overseas trade and are struggling to find the right method, we recommend speaking to one of our finance experts who will be able to clear up any confusion you have. Take a look at one of our testimonies:
We were not sure how to ship goods and what terms to use. We spoke this through with Trade Finance Global as we also didn’t know what finance to use; whether we should use pre-export finance and pay within country, pay cash against documents and arrange shipping ourselves or pay when the product was sent to our home port and let the seller arrange shipping. Helping us to clarify this has allowed us to trade smoothly.
Ex Works EXW
Free Carrier FCA
Carriage Paid To CPT
Carriage and Insurance Paid To CPT
Delivery at Terminal DAT
Delivery at Place DAP
Delivery Duty Paid DDP
Free Alongside Ship FAS
Free on Board FOB
Cost and Freight CFR
Delivery Duty Unpaid DDU
Cost Insurance and Freight CIF