If your business involves shipping, importing, and exporting, then understanding freight costs is going to be a huge part of making your business a success. One of the key things you need to understand is the concept of FOB pricing or FOB shipping. FOB stands for Free On Board, and it’s used when referring to the importing of goods to the UK.
FOB is an Incoterm (International Commercial Term), that shortens certain commonly used terms and phrases to help with efficient communication in international trade. In this instance, FOB is used to explain who is responsible for the costs involved when a shipping vessel is used to move goods.
In this article, we’ll discuss FOB price meaning, how it works, and some of the other intricacies involved in FOB.
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What Is FOB?
FOB means Free On Board and it’s commonly used when discussing sea freight costs. Under FOB terms, the seller pays for the costs of shipping the items in terms of loading the goods on to the ship.
The shipping costs themselves, e.g. the cost of moving the goods whilst on the shipping vessel and then unloading at the other side is covered by the purchaser. Under a FOB shipping point agreement, the seller retains ownership before the goods arrive on the ship, and the purchaser gains ownership once the goods are on board.
If the goods become damaged prior to the shipping process, it’s the responsibility of the seller. Responsibility for the goods transfers to the buyer once on board, meaning they’re responsible for transportation costs and any damages from then on.
“FOB shipping point”, “FOB destination”, freight collect”, or “FOB origin” are terms that indicate that the buyer is the one at risk once the seller has shipped the product.
“FOB destination, freight prepaid” means that the seller is the one who retains the risk until the goods safely reach the buyer.
How Does FOB Work?
If your business involves import and export, then understanding FOB is the key to understanding freight charges so you understand how much importing and exporting will cost you. It’s also important to note that FOB shipping used to only apply to ships, but now it’s commonly used across all types of transport.
The seller is responsible for getting the goods on to a vessel that will eventually make it to an arrival port in the buyer’s location. These costs include:
- Local haulage
- Loading and export customs
- Clearance
From this point, it is the buyer who takes over responsibility for all of the costs and risks that may be involved in the process. The buyer pays for any further transportation costs from the moment the goods arrive on the ship.
In business, contracts are incredibly important. Contracts are even more important in import and export businesses as knowing your responsibility for the goods and when you, as the buyer, assumes responsibility is key to knowing your costs. FOB shipping terms should be included in any buying/selling contract that involves import and export, making clear who is responsible for the goods at which stage, including any shipping costs and insurance paid.
The bill of sales agreement will denote who owns the goods at which stage, too, which will be needed when insurance claims are made if damage or loss occurs.
What Does FOB Price Mean?
As soon as the goods have arrived at the port and have been loaded on to the ship, the buyer assumes responsibility for the goods and any costs associated with them. The cost of shipping, insurance, and having your goods unloaded, pass through customs clearance, and then arriving at the final destination will all be the buyer’s responsibility from this moment on.
If you’re new to your import/export business, then this process can be intimidating at first. That’s why you need to be especially clear in contracts with those you buy and sell from. If you’re buying items in bulk, for example, and then selling them individually for a profit, you’ll need to factor in all of the costs of buying those goods AND having them shipped to your final destination. These costs could be quite high, so factor that into your budget. Being over cautious with budgets in any business is better than being caught out.
International shipping payments can turn out to be quite expensive, in some cases more expensive than the items you’ve bought in bulk. Overall costs may be higher than you initially imagined before starting your business, which will eat into your profits. Make sure you do thorough research beforehand to ensure you know exactly how much getting the goods to you will be.
Can I Save Money With FOB?
Whilst FOB shipping terms can be a great way to ensure you know exactly how much you’ll need to pay for shipping, and at which point you become liable for those costs, it isn’t necessarily a money saving tip for businesses. What it does do, however, is make clear what you’re responsible for and when in terms of costs, and this can be a great way of ensuring you know the total cost to your business of buying certain products.
With that information, you can then alter your final purchase price for your customers, ensuring you make a fair profit for the goods you’re selling.
It’s also important to remember that generally the more goods a business ships, the higher their outgoings will be, as you’ll be responsible for plenty of shipping costs and insurance costs. Additional costs may also be present if you’re buying enough goods that you require the support of extra employees to help with the unloading, organising, and onward selling of all those goods.
At first, you may be able to get away with running an import/export ‘buy-in-bulk, sell individually’ business from your home, but as you become more successful, you’ll need to factor in the renting of a warehouse or storage facility space to use.
So no, FOB shipping won’t necessarily save you any money as a business, but it will allow you to get organised. With that said, if you can organise your business so that you buy more items in bulk from the same company, then the cost of shipping will be greatly reduced as you’ll be paying for the shipping of one total order, rather than multiple individual shipments.
A Worked Example Of FOB Shipping
The below example will give you a better idea about how FOB shipping could impact a business. Let’s explore a fictional example below:
Imagine there’s a t-shirt company manufacturing t-shirts in India, but your business, based in the UK, plans to buy these t-shirts in bulk and sell individually via your own online site. You can choose the FOB shipping point as part of your FOB agreement.
If the FOB point is marked as India, then it would be your UK business’ job to pay for the shipping costs and insurances associated with the goods, and any damage or destruction would be your responsibility from the moment the goods are on the ship.
If the FOB point is marked as the UK, then it would be the company’s responsibility in India to ensure the goods get to your UK destination safely – including all costs necessary here.
Are There Any Risks Involved In FOB?
Before you sign any contract in business, you need to be aware of the risks involved.
When you’re importing products from abroad and if the FOB shipping point is listed as the place from which the goods are shipped, then it’s your responsibility to cover all of the costs of shipping – which could come as a surprise for those who aren’t used to FOB terms. The moment the goods are loaded onto the ship, it’s your responsibility.
You should remember that things can go wrong when shipping goods. The greatest risk to you is damage occurring whilst in transit. Ensure you have comprehensive insurance in place to mitigate any losses.
What Do Critics Of FOB Shipping Say?
Many people criticise FOB shipping for a range of different reasons. The terms are so often misunderstood that sellers can almost hide the responsibility and shipping cost information behind the shipping point without explanation. This could be detrimental to the buyer if they hadn’t planned for the costs involved.
More information is required and clearer contracts are necessary to ensure all parties understand their responsibilities and costs.
Using our guide today is one way that you can better wrap your head around FOB shipping to ensure you know how much you could pay for shipping, and why.
There are a number of other drawbacks to FOB shipping that ought to be considered too:
- Higher unit prices – Generally the prices are higher for individual goods when buying per unit compared to other shipping methods. Buying in greater quantities means higher prices, but as this avoids shipping costs then the costs might average out over time.
- Unfair shipping costs – Local transport costs can actually be raised if you’re responsible for the cost of the goods getting to the port in another country. Some buyers mark these shipping costs up when they know your business is operating in a typically richer country.
Advantages Of FOB Shipping
FOB is a common term in international trade, so there must be a range of advantages that keep people using this shipping method.
If you know the FOB point then you can understand exactly what you’re responsible for in terms of cost and that is reassuring as a business owner.
If the seller is responsible for the shipping and the moving of goods from their country on to the ship, then you don’t have to deal with any of that, removing some logistical stress. Trying to move the products through a country you don’t know is an unnecessary stress. It’s much easier to let them handle this.
If you’re responsible for the international shopping costs and insurances, then you can shop around, choose a shipping company you trust and build a relationship with any insurance company you use frequently. By making these arrangements you take control of the process from the moment the goods arrive on the ship and from then on, allowing you to keep up to date with the process when it’s heading to a country you know.
FOB shipping is used by some of the biggest suppliers and UK business owners, so clearly it does a lot right. Understand how it could help your growing business, make sure your contracts are clear, and FOB shipping could allow you to keep control of the process and costs.
How To Organise FOB Shipping
If you’re buying goods on FOB terms, then researching what it all means has been a great start – but there are some additional tips we can pass on to make the process smoother.
First, you might want to consider talking to a freight forwarder. These help with UK import and transportation set up and helps simplify the process for your business. You’ll deal with this one point of contact and they’ll organise the rest for you.
Of course, you could make all the shipping arrangements yourself but this could become stressful if you’re new to the process. This could mean organising:
- shipping from the country of origin
- transportation from the port to your warehouse
- clearing customs
- and more
If you’re solely responsible for the paperwork here, then it can add up quick and the stress could mount with it.
Final Thoughts
Shipping expenses are a huge overhead for any import/export business that needs to be thought about carefully. FOB shipping and the costs involved can complicate matters if you don’t fully understand what it means. Ensuring your contracts are clear when it comes to FOB shipping is crucial in ensuring you know exactly what you’re responsible for and when. This will lead to success as a business starting out in import and exports.
Hopefully our guide today has proven useful in helping you understand exactly what FOB shipping is, how you can make use of it as a business owner, and whether or not it’s beneficial to you. Further research will help determine your best course of action and help you decide how FOB status and shipping impacts your business.
