One of the ideas that you need to have a solid understanding of is FOB if you’re a business owner or an aspiring business owner who deals with import and export. Free On Board, or FOB, is a common Incoterm.
The FOB (Free On Board) price is the cost of goods at the exporting nation’s border or the cost of a service rendered to a non-resident. Included are the costs of the products or services at their base prices, the costs of transportation and distribution up to the border, and taxes less any subsidies.
In this article, we’ll talk about the meaning of FOB prices, how they work, and a few other FOB-related nuances.
Incoterm Related Post: FCA Shipping
Table of Contents
What Is FOB?
FOB (Free On Board) is an Incoterm (the sets of rules for international transit detailing responsibilities between suppliers and buyers) that evenly split the costs and responsibilities between the buyer and supplier.
The seller is liable for ALL expenses incurred in the country of origin, up to and including the cost of loading the goods onto the ship at the port of departure. The buyer then covers all expenses moving forward, including freight and all expenses in the country of destination.
How Does FOB Work?
For any type of import/export negotiations, a business owner must have a solid understanding of how FOB works. Formerly only applied to goods transported by ship, FOB is now used to describe almost all modes of transportation.
To get the goods to the port in the country of origin under FOB terms, the seller must make all necessary arrangements. Usually, there are the following costs involved:
- Local haulage
- Loading and exporting customs
- Clearance
From this point forward, all costs and risks associated with the transaction are the buyer’s to bear.
The FOB terms for any official contract between a vendor and a client must be evident in the purchase order and must be very clear. It must expressly state who is responsible for paying the shipping and insurance costs. You should also be aware that the ownership of the goods is not determined by their FOB status. The bill of sale specifies ownership.
What Does The FOB Price Mean?
In accordance with the standard FOB conditions, once the goods have been delivered to the port and loaded onto the ship, the buyer is the one who assumes responsibility for the shipping expenses. It will be your responsibility to pay for shipping, insurance, unloading, customs clearance, and transportation of your goods to your location or storage facility. When it comes to FOB shipping, it is safe to say that it is a rather intimidating process that can be difficult the first time around and entails a lot of costs for the buyer.
International payments and transactions can be quite expensive, which raises your overall costs and reduces your profit margin. This is one factor that should be taken into account. No business owner wants to hear these phrases! For international transactions, you can anticipate holding fees up front, and banks frequently round up exchange rates. Consequently, there are a few things you should be aware of if you are sending money overseas.
Read More: CIF Vs. FOB
Who Is Responsible For Paying Under FOB Terms?
In the case of FOB shipping, your supplier will cover all costs up until your goods are loaded onto the ship, including transportation, export permits, outbound country customs, etc.). After that, it becomes your responsibility to take care of shipping, customs clearance, and delivery in the UK. To do this, you must arrange a freight forwarder.
Please keep in mind that even if your supplier pays, you will still be providing them with the funds to do so on the invoice. Your supplier will either include it in the price of the goods or charge you extra for it.
How To Save Money Under FOB?
Bank transfers abroad can be very expensive, as we’ve already mentioned. Due to the fact that some alternative payment methods are actually focused on making international payments more affordable, doing so is occasionally a better idea. One of these alternatives is TransferWise, which employs a precise exchange rate and a minimal transfer fee that is totally transparent. You can anticipate paying significantly less when using a service like TransferWise than you would if you were using a high street bank to make a traditional international payment. The fact that TransferWise is totally secure and subject to FICA regulation is the icing on the cake! Among the many current payment methods that are highly recommended for investigation is TransferWise.
As a company orders goods more frequently, it is expected that shipping and insurance costs will increase. This is another cost that you need to take into account. The need to hire labor to unload the goods and the rental of a warehouse facility to store the items you ordered both results in additional costs. How can some of these costs be reduced then? The number of individual shipments can be decreased by placing larger orders at once.
Benefits Of FOB For First-Time Importers
Let’s jump in and state the obvious right away: FOB is nearly always our recommended Incoterm. While we can accommodate the majority of shipping conditions, we believe FOB is the best choice for novice importers. Why? Let’s see.
1. You Can Manage Costs With Fob.
FOB allows you to see all of your costs upfront. Your supplier will send you a single invoice for the first half of the process, and your freight forwarder will send you a single invoice for the second half. Before making any decisions, you can get quotes and learn how much everything will cost. If you’re shipping into the UK, get in touch with us so we can provide you with a free, no-obligation quote and walk you through the procedure.
For budgeting purposes, it’s imperative for small or start-up businesses to know all of their costs in advance; otherwise, they risk being destroyed by unexpectedly high costs.
2. Fob Is Easy.
On FOB shipping terms, you don’t have to do or organize anything. Your supplier is in charge of the first half of the process, and your freight forwarder is in charge of the second. Simply ensure that you are home to accept delivery if you only need to do that! Furthermore, you don’t even need to do that if you’re delivering directly to an FBA warehouse.
3. No Unpleasant Surprises Await At The Conclusion.
For those who don’t have a thorough understanding of shipping, this reason may be a little more challenging to explain.
Consider it this way: The process of shipping has a (rough) fixed cost for all the services and steps in the process. Shipping terms determine who finds and pays for each service. If your supplier is responsible for the payment, you will pay the supplier more to cover these costs. It doesn’t negate the cost or mean you don’t pay – it means that they pay using the money you’ve paid them (which can save you money as they know their local markets and services better) and that you aren’t responsible for finding the service yourself or if anything goes wrong with that service.
All those costs get pushed onto an invoice at the end. The $300 difference still needs to be paid because it goes to delivery services, customs, shipping lines, freight forwarders, etc., and is not a profit. It’s the cost of all the services in the process and it needs to get paid. You’ll discover a sizable charge that needs to be paid on your customs bill after your goods are cleared into the UK that you weren’t anticipating or budgeting for.
Risks Of FOB
You should have a thorough understanding of all the risks involved before you sign anything that might be related to FOB.
You, the buyer, are in charge of all costs and risks associated with the shipment when you import goods from abroad using the standard FOB terms. The moment your goods are loaded onto the vessel is when you become responsible.
It is always advised to enroll in a reputable insurance plan that offers you comprehensive coverage in the event of an emergency in order to reduce these risks.
How To Set Up A FOB Shipment?
You might want to look into finding a freight forwarder to help you with setting up the procedures of UK import and transportation once you have completed all of your research and are prepared to purchase goods on FOB terms. Since you only need to deal with one person, this makes things easier, especially if you are new to the procedure.
Making all the arrangements yourself is the other choice that is open to you. You must take into account each step of the process to accomplish this. Keep in mind that as the buyer, you are in charge of everything, including local haulage to your shop or warehouse, customs and clearance procedures, and sea freight from the country of origin. A customs broker can be of assistance if you are struggling with the amount of paperwork and other details involved.
Depending on the path you choose, you might end up spending more money and losing more time. Recognize your limitations and seek professional assistance when necessary.
An Illustration Of FOB
No matter how simple or fictitious it may be, it’s always a good idea to look at an example in order to better understand FOB.
Let’s use the example of “Chippy’s Clothing Brand,” which produces T-shirts in Mumbai, India, and sells them to “Sailor Season,” a retailer in the UK. When the FOB shipping point is specified as Mumbai, Sailor Season will be held accountable for any product damage or loss. Shipping and insurance costs would be their responsibility.
Alternatively, if the shipped goods were marked with a FOB destination of UK, it would be up to Chippy’s Clothing Brand to make sure that the goods reach Sailor Season in the UK, and they would be responsible for any loss or damage.
FOB Vs. CIF
Who assumes liability for goods while they are in transit makes a significant distinction between the two. When the goods are marked as delivered and on the ship under FOB, the buyer assumes control.
The seller or manufacturer is in charge of the goods with CIF freight up until the time they arrive at the port of destination.
Using either arrangement has benefits and drawbacks for both parties. With CIF, the seller has the option to mark up the cost of insurance and transit, thereby increasing the transaction’s profitability. Additionally, they are free to select the shipping method of their choice and may not shop around for the best price if the cost is being transferred.
The Bottom Line
The fundamentals of importing and exporting are understood by using the FOB Incoterm.
We were surprised to see how little we had actually written about it because it plays such a big role in our company.
If you have any comments or questions about it, please do so.
Other Posts You Might Like: Is It Safe To Buy Products From China?
