What does FOB mean in shipping?
Shipping terms can often be confusing. To help, here are a few nuances that you should know before you enter a business contract for products. Having a complete understanding of your shipping rights and responsibilities at the outset of your agreement will save significant time and headaches down the road.
One of the terms that you are likely to see is "FOB." So, what is FOB? And how does delivery FOB affect your business?
What does FOB (Free on Board) mean in shipping?
The shipping term FOB means Free on Board. It is used in both domestic and international shipping. The FOB terms set out who is liable for the shipping cost and who will need to address any damages if the product is harmed during the shipping process.
However, you should not assume that you are responsible for the shipping costs and liability just because you see FOB on an invoice or agreement. Instead, there are several designations inside of the FOB terms that dictate cost and risk allocation.
How is "FOB" used in shipping documents?
The term FOB has several subcategories, and each one has a different meaning.
- FOB [place of origin], Freight Collect
- FOB [place of origin], Freight Prepaid
- FOB [place of destination], Freight Collect
- FOB [place of destination], Freight Prepaid
For example, FOB [place of origin] means that the seller will only be responsible for the costs and liabilities associated with shipping from their place of business to the port. The cost and risk of damage pass to the buyer right away at the originating port.
How each of these terms function when you are shipping will depend on the FOB destination and the shipping point.
FOB Destination Meaning
The "destination" for FOB is where the goods are going. When your paperwork says "FOB [destination]," then the buyer assumes the ownership and control of the goods when the products reach their final destination.
FOB Shipping Point Meaning
The FOB shipping point or place of origin is where the products are shipped and start their movement toward their final destination. In the early days, whatever port they were leaving from — today, that can be wherever the transfer process starts.
When your paperwork says FOB [origin], the buyer assumes ownership and control when the products leave the shipping point.
Freight Collect vs. Freight Prepaid
The other portion of the FOB designation sets out how the freight costs are paid in the transaction. Specifically, each type of shipping can have the freight costs paid upfront (prepaid), or they may need to be collected after the products arrive to the buyer.
When the freight must be collected, the person receiving the shipment is responsible for all of the freight charges. Freight collect means that the buyer takes on all of the risks and is responsible for getting insurance and filing a claim if the products are damaged in shipping.
Freight prepaid works the other way around — the person or entity shipping the goods takes responsibility for the freight charges and risks associated with any losses in shipping.
Why should you care about FOB terms?
The most important reason you should understand FOB terms is that they set out who is responsible for certain costs and who must take action if the products are harmed or lost during the shipping process.
In many cases, receiving docks will refuse products that are obviously damaged when they arrive. However, if you, as a buyer, have agreed to take on the risk that the products are damaged because you agreed to FOB [place of origin], then refusing the shipment can violate the terms of your agreement with another party.
These terms help buyers and sellers specifically set out who they intend to bear the risk of shipping when they enter an agreement. While shipping terms can be confusing, they can be very helpful as well.
For help with understanding these terms and a lot more, Unishippers is here for you. We will help you address shipping questions and concerns so you can focus on your business. Contact us for more information.