Defining the meaning of Freight on Board or Free on Board: Understanding the differences between the FOB and CIF and which option is better for your business
Today we will explain the importance and meaning of FOB in shipping, as well as the differences between FOB and CIF. You have probably heard these terms floating around in the sea of freight management abbreviations but weren’t clear about their exact meaning. Understanding these terms is especially important for eCommerce business owners that are just getting started with the process of taking their business globally and are trying to determine the most effective solution for their clients.
Freight on Board (FOB) meaning
Put simply, FOB (Freight on Board or Free on Board) is a shipping term that determines who oversees paying transportation costs. It pertains to where and when ownership is transferred from the seller to the buyer. It refers to the set of Incoterms (International commerce terms, established in 1936) that governs all the details regarding ownership and payments for shipments transferred overseas.
Today, supply chains stretch across the globe, and boundaries between distant markets only continue to expand. Yet, sometimes understanding all the terms and conditions of both international and domestic shipments can become confusing. FOB has become one of the most-used commercial terms when it comes to shipping contracts. When it comes to domestic operations, there are three important documents to consider: the bill of lading, the freight bill, and FOB terms.
The FOB process includes two sides, often referred to as the origin and destination. FOB determines where the responsibility of one party finishes and the other begins. FOB origin places the cost on receivers, and FOB destination places the cost on the sellers. These terms need to be properly established in the documentation.
To understand this process better, we will explain each of these two parts, and establish who is responsible for each of the stages of shipping. The stages are the following:
- Freight prepared – If the documentation states FOB origin, the shipper is responsible for the costs of shipping, but the receiver takes responsibility for the freight at the point of origin. If the documentation states FOB destination, the shipper takes the responsibility for everything until the freight reaches the destination.
- Freight collect – if the documentation states FOB Delivery, the receiving party is responsible for all costs when the delivery is successful. Conversely, in cases where the documentation states Freight Origin, Freight Collected implies that the receiver bears all of the responsibility
- Freight collect and allowed– In cases where FOB Destination is indicated in the documentation, freight collect and allowed means that the shipper takes partial responsibility, but the receiver deducts the freight charges from the shipper
- Freight prepaid and charged back: In cases where the documentation states FOB Origin, the shipper will not pay for the cost of shipping, but instead adds the freight cost to the existing invoice and the receiver pays for shipping by paying the more expensive bill. [IH5]
Difference between CIF and FOB
Another option that is often used for international shipping agreements is also CIF (Cost, Insurance and Freight). CIF and FOB do share some similarities: both are shipping agreements that hold information about freight origin and destination. They both specify who is in charge and where this process starts and ends. Although these two are similar, CIF is often considered a more expensive option. In this case, the seller determines the rules and chooses a freight forwarder, which can end up charging more to the buyer, all for the sake of better profit. There is always a problem of miscommunication because the buyer is in touch with people who act on behalf of the seller. Also, the buyer still needs to pay additional fees. The responsibilities of the seller are transportation to the port, paying the insurance, and loading them to the vessel.
FOB is a bit of a different story. Once the goods are shipped, the responsibility passes from the seller to the buyer. It’s common for buyers to prefer CIF, while sellers often prefer FOB. Smaller companies often want a larger party to be in charge and take responsibility for everything.
If you are planning to start a new eCommerce venture, you need to consider all the aspects of everything to flow smoothly. If you have additional questions about documentation and making the entire shipping process easier, feel free to contact Freight Management Logistics – the only shipping company you will need.