Set by the International Chamber of Commerce, Incoterms help define to importers and exporters a set of rules that can determine when goods are considered delivered and whether or not the buyer or seller has responsibility.
One of the most critical Incoterms to understand is Free on Board (FOB). This rule relates specifically to sea freight, so if you're planning on exporting via sea freight, you should understand the ins and outs of the Free on Board incoterm.
Why are Incoterms Necessary?
International shipping can be a very confusing process. It can be difficult to determine who should pay for what and who is responsible at what section of the shipping process.
This is where Incoterms come in. Incoterms are used to:
- Explain the costs and obligations incurred between the buyer and seller. The shared nature of Incoterms allows for a clear, straightforward understanding between the two respective parties.
- Incoterms allow for a clear understanding of the risk involved with cargo, allowing for mutual understanding between buyer and seller.
- With so many different parties involved in the shipping business, incoterms allow for a more streamlined communication process.
What does FOB mean?
FOB is an Incoterm that can only be used during sea freight shipping. The FOB rule is usually used when a seller has effortless access to a ship (or vessel).
FOB means that the goods are delivered to the buyer via a ship chosen by the buyer. After the goods are on the ship, the buyer bears all costs.
In other words, using the FOB Incoterm, the supplier will arrange for your goods to be sent to the port of origin and, once the goods are on board the ship, everything from this point is your responsibility.
Benefits of FOB
FOB Incoterms helps both the shipper and the buyer, laying out each party’s responsibilities and giving each party more control while the cargo is in their respective territory.
For the buyer, FOB gives them the most control over logistics and the cost of shipping, allowing the buyer to choose their shipping methods. Control over shipping method and cost means that FOB Incoterms can also be the most cost-effective method.
FOB Incoterms also allow the buyer to choose a freight forwarder, streamlining the shipping process reducing the chance of errors in the shipping process.
Choosing the right freight forwarder can take the stress out of the shipping process, with the freight forwarder covering each step of the import process; choosing the right container, transit route and port, warehousing, customs, and delivery. Each of these elements will be made clear by the freight forwarder before your goods arrive. If you're working with a freight forwarder, they can provide a full breakdown of import costs to the SKU level.
FOB Incoterms are also favoured by the seller, as it makes clear that the sale is considered complete once the cargo has left the seller’s premises.
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