Freight on Board: How to Use It in Shipping Terms of Sale

FOB in shipping determines who pays for shipping and takes responsibility for the freight at a specific time. Short for “free on board,” FOB terms of sale can impact inventory, shipping and other costs. Keep reading to learn more about FOB agreements and modifiers and how they impact buyers and sellers. 

What Does FOB Mean in Shipping?

In the context of shipping and logistics terms, FOB is short for “free on board.” Some people may also refer to FOB as “freight on board,” though this is a less common term used in the industry. FOB indicates when the liability and ownership of shipped goods officially transfer from the seller to the buyer. FOB shipping terms of sale also outline whether the buyer or the seller is responsible for freight costs.

FOB terms clearly define ownership and assumed risk at every point of the shipping process. It is especially important to define these terms in case any goods are damaged or destroyed during shipping. FOB decides who is responsible for the loss or cost of replacement based on when the damage occurred. The FOB designation determines when the title of an item transfers from seller to buyer. 

There are two main types: FOB origin and FOB destination. Let’s discuss what those mean.

The Meaning of FOB Origin 

FOB origin means the buyer takes responsibility for the goods at the shipment point. It’s the most common agreement between international buyers and sellers when shipping cargo by sea.

The seller keeps the title and ownership of the goods while transporting them to the shipment port. They package goods, clear customs, and deliver cargo to the loading port to ensure safe travel. For example, they would be responsible for packaging the goods at their warehouse and loading them onto trucks to deliver to the customer.

After the seller loads the goods onto the transport vessel, the buyer accepts the title and all risks. When the carrier signs the bill of lading at the shipping point, the buyer gains ownership and control of the goods. The goods are under FOB origin. 

From that point forward, the buyer is responsible for all costs, including shipping costs and freight insurance. They are responsible for paying to unload the cargo at the arrival port. They are also responsible for moving the goods to their final destination, such as a warehouse facility. The buyer must pay any import duties and complete the customs clearance related to the shipment, if applicable. 

With domestic freight shipping under FOB origin terms of sale, the seller packages and loads the goods onto the truck. The buyer assumes title for the goods at that point, including any additional charges that may arise, like highway tolls. When the delivery arrives at the buyer’s place of business, it’s up to them to unload the goods safely. 

Transactions conducted under a FOB origin designation can define the specific name of the originating port for added clarity. For instance, if an overseas shipment is headed toward the United States, it may be designated as FOB Shenzhen or FOB Busan. 

FOB Origin Variations

By default, FOB origin indicates the buyer is responsible for all freight charges. FOB origin modifiers affecting freight charges are handled as follows:

• FOB Origin, Freight Collect: The buyer pays and bears freight charges and shipping costs.
• FOB Origin, Freight Prepaid: Seller pays for shipping. Buyer takes responsibility for goods at the point of origin, but the seller covers all shipping costs.
• FOB Origin, Freight Prepaid and Add: Seller pays for shipping upfront but adds the cost to the buyer’s invoice, so they eventually reimburse themselves. 
• FOB Origin, Freight Collected and Allowed: The buyer pays for shipping costs but subtracts this from the amount owed to the seller. 

The Meaning of FOB Destination

FOB destination is the opposite of FOB origin. Instead of the buyer being responsible for the goods with FOB origin, with FOB destination, the seller is responsible during transit. The seller gives the shipment to the buyer at the time and place of delivery. At this point, the buyer becomes responsible for it.

Like FOB origin, FOB destination can also be defined by a specific point of place—this may be at the destination port. The seller is responsible for all freight charges and documentation while the cargo is en route. They’re responsible for safely unloading the goods from the transport vessel. Should the purchaser agree to receive the goods at the destination port, they bear the responsibility for the expenses associated with moving the items to their ultimate location. 

FOB shipping terms may indicate that the buyer’s place of business is the “destination.” In this case, the buyer refuses the title and doesn’t take on all risks until the seller has successfully delivered the goods. 

Before shipping the goods, the seller needs to choose a carrier. If there is any loss or damage during shipping, the seller must also file a claim with their insurance company. For example, say a parcel of goods isn’t properly secured during transport. It gets damaged when it falls over. In this case, the buyer may refuse delivery, and it’s up to the seller to seek compensation from their chosen carrier or insurance policy. 

FOB Destination Variations 

Unless otherwise stated, FOB destination designations mean the seller is responsible for freight charges. Possible FOB destination modifying clauses may include:

• FOB Destination, Freight Collect: The seller keeps ownership and takes on risk during transport, while the buyer pays for shipping costs.
• FOB Destination, Freight Prepaid: Seller pays and bears the freight charges.

Important FOB Terms for Freight Payment

FOB origin and FOB destination determine when ownership of a shipment changes and who pays for shipping. FOB terms, or freight terms, are most commonly listed as collect, prepaid, third party or pre-paid and add.

• Freight Collect: The carrier collects all transportation charges from the buyer (consignee). The buyer assumes all risks and is responsible for filing a claim in the case of loss or damage. 
• Freight Prepaid: The carrier collects freight charges from the seller (consignor). The shipper is responsible for all risks while the goods are in transit. Typically, FOB terms involving freight prepaid will state when and where the seller is no longer liable. 
• Freight Prepaid / Collect Beyond: This combines the two FOB terms above. In this case, the seller is responsible for a prepayment portion of the freight charges up to a certain point. The carrier collects the remaining balance from the buyer after that point. 
• Third Party: A third party, neither the buyer nor the seller, is responsible for paying freight charges. While the third party may pay for freight costs, the bill of lading still outlines legal title and responsibility for the goods. The third party usually doesn’t have to pay legally. This often happens when payment is given to an outside service.
• Freight Prepaid and Add: The seller pays the carrier for the freight charges upfront. They then seek reimbursement for this added cost from the buyer by adding it to their invoice. The amount may equal or approximate the actual transportation charges. 
• Freight Prepaid and Allow: The seller pays the carrier for freight charges like the above. This type of freight term includes the transportation cost in the original price. It differs from Freight Prepaid and Add, where the charges are later added to the invoice. 

Ship Confidently With MVP Logistics

Ranked on the Inc. 5000 for 2023, MVP Logistics is one of the fastest-growing private companies. Companies that made the list were identified for driving rapid revenue growth while navigating inflationary pressure and rising capital costs. At MVP Logistics, we pride ourselves on our unwavering commitment to our core values, which all relate to an excellent customer experience. 

With this dedication, we strive to surpass customer expectations. Trust that we’ll deliver on this promise when you hire MVP Logistics for all your freight, shipping and logistics needs. Contact us today. 

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