Sea freight is one of the cheapest and most advantageous options. Before exploring this option, it’s important to choose the right shipping terms, which will most likely be FOB (Free On Board).
What is FOB (Free On Board) according to Incoterms 2020
FOB (Free On Board) is a delivery term included in the official Incoterms rules for international trade. There are 11 terms (groups) in total, including EXW, FCA, CPT, DAP, and others.
More specifically, FOB can be defined as follows. FOB is when the seller is responsible only for loading the goods on board the vessel, at the port specified by the buyer. After this, the seller assumes all costs and obligations related to the goods.
What are the key points of FOB (explained):
- Obligations and risks regarding the goods pass upon loading onto the vessel;
- Customs clearance for export is the responsibility of the seller;
- The buyer arranges transportation and related services (insurance);
- The buyer handles import customs clearance.
FOB is used only for river and sea shipping, primarily containerized.
Seller’s Obligations under FOB Terms
The most important point in each Incoterm is the moment when responsibility for the cargo transfers. In the case of FOB, this moment occurs upon loading the goods on board the vessel at the agreed port. Specifically, immediately upon the cargo passing the vessel’s rail.
What does the seller do under FOB terms of delivery:
- provide an invoice with all details of the goods and payment;
- deliver the cargo for loading on board in accordance with the agreed time and place;
- perform export customs clearance;
- provide packaging and labeling for the cargo;
- complete port procedures;
- inform the buyer when the cargo is ready for loading on the vessel;
- deliver the goods to the vessel selected by the buyer;
- Provides the buyer with confirmation that loading has taken place (in particular, by means of a bill of lading).
In general, the seller must fully prepare the goods for export. They bear direct legal responsibility for the delivery of the products or raw materials.
Buyer’s responsibilities under FOB: delivery, freight, and risks
What the buyer does under FOB terms:
- provides the seller with delivery information (date, time, vessel, and port details);
- selects a vessel and books freight;
- arranges transportation from the port of loading to the destination;
- handles import customs clearance;
- pays necessary duties and taxes;
- insures the goods, if necessary.
Furthermore, the FOB price includes delivery to the port, port costs for export, and loading onto the vessel. However, it does not include ocean freight, insurance, or import duties.
If the buyer’s carrier has different procedures or terminals, the seller may charge additional local costs (origin charges) that the buyer did not expect. Advantages and Disadvantages of FOB for Seller and Buyer
The advantage of the FOB Incoterm for all parties is cost transparency and a clear transfer of responsibility for the cargo.
| Advantages | Disadvantages | |
| For the buyer | Full control of logistics;
the opportunity to save on shipping; cost planning; the ability to obtain favorable freight rates through direct negotiations with carriers. |
Complexity in organizing logistics processes; greater responsibility (especially with regard to risks and force majeure); increased paperwork. |
| For the seller | Fewer obligations after loading and fewer risks. | Limited control over the delivery of goods, as you must adapt to the buyer’s choice. |
For the buyer, organizing FOB definitely requires extensive experience in international shipping and customs clearance. Therefore, FOB Incoterms 2020 may seem complicated for small businesses. When to Choose FOB, and When to Choose CIF, EXW, or Other Terms
FOB delivery terms are often chosen by businesses importing electronics, household and industrial goods, furniture, tools, clothing, etc. However, there are other delivery terms that may best suit a specific situation.
For small shipments, FOB delivery terms are unlikely to be appropriate. Also, for example, if the buyer is new to importing and the cargo volume is small, CIF would be more advantageous—under this term, the seller pays ocean freight and basic insurance when delivering the cargo to the port of the buyer’s country.
EXW (Ex Works) provides the seller with minimal responsibilities. This Incoterm is suitable for situations where the buyer wants maximum control over the entire process.
Conclusion: When is FOB best suited:
- container shipping by sea;
- regular container shipping;
- for heavy or oversized equipment;
- large shipments (FCL);
- for international and major ports of departure (China, Turkey, USA);
- when costs need to be reduced.
What is FOB in simple terms? It’s an ideal option if the seller is unreliable in delivery. For example, they may delay delivery times, lack contracts with carriers, or use too many
intermediaries and inflated freight prices. FOB eliminates all these problems—it only covers delivery to the port.
Example of FOB delivery
A complete and clear list of documents is absolutely essential for preparing FOB delivery. This is the only step for which both the seller and the buyer are responsible, as each requires the submission of different documents.
What documents are required for FOB delivery:
| From the seller | Commercial invoice;
Packing list; Export declaration; Loading confirmation; Bill of Lading. |
| From the buyer | Freight/booking agreement;
Loading instructions to the seller; Insurance policy (optional); Customs and import documents in the receiving country. |
Depending on the type of goods and the country of import, additional permits and certifications may be required. This is the responsibility of the seller. They are required to provide a certificate of origin, phytosanitary certificate, and veterinary certificate.
An example of FOB delivery for food or agricultural products:
- The buyer sends the seller certification requirements (phytosanitary certificate, certificate of origin, and quality);
- The seller prepares the goods and undergoes state inspection;
- The buyer books a vessel and sends SI (Shipping Instructions – the buyer’s official instructions to the shipping line);
- The seller delivers the goods, undergoes inspection, and loads them on board;
- A bill of lading is prepared taking into account the certificates (the bill of lading is prepared and issued by the shipping line or its agent);
- The buyer receives a set of import documents;
- The buyer picks up the goods at the destination port and clears customs.
This example is suitable for goods requiring additional certification, inspections, or export controls.
How a logistics company helps with FOB deliveries
FOB delivery terms require significant transportation experience, so businesses overwhelmingly delegate the entire organization to transport and logistics companies.
Professionals will organize all freight, handle negotiations, and prepare all documents. This minimizes errors, ensures speed and reliability, making logistics companies a must-have for FOB shipments.
