FOB incoterms (Free On Board acronym), is one of the commonly used trade terms in international trade.
According to the FOB transactions, the buyer is responsible for sending a ship to receive the goods, the seller should be in the contract port of shipment and the specified period of time will be loaded on the buyer’s designated ship, and timely notification of the buyer. When the goods are loaded onto the designated vessel at the port of shipment, the risk is transferred from the seller to the buyer.
Revised American Foreign Trade Definitions, 1941》 of FOB is divided into six interpretations, of which only: FOB Vessel, “named port of shipment” and the 2000 General Rules of the FOB terminology is similar to the interpretation.
FOB incoterms under the consignor to bear what costs?
Regular payable expenses
We all know that under FOB conditions, the consignor is generally only responsible for the port of embarkation costs, that is, the costs before embarkation, including: lifting fees, packing fees, port charges, port security fees, bill of lading fees, manifest entry fees, terminal handling charges (THC) or origin surcharge (ORC), sealing fees, customs clearance fees and so on.
Costs of unforeseen circumstances
(1) The cost of improper connection between ship and cargo
FOB, ship and cargo connection is the key. If there is no timely loading of containers into the port on the ship, that produces empty cabin fees, demurrage fees, etc. will be borne by the consignor.
(2) No one at the port of destination to pick up the costs incurred
(3) High cost of appointed agent
(4) Compensation for cargo damage
(5) Release of goods without a bill of lading: Since the designated freight forwarder usually maintains a close business relationship with the consignee, the designated freight forwarder is very likely to release the goods directly to the consignee without recovering the original bill of lading, resulting in the consignor holding the bill of lading, but in fact has been emptied of the goods, which ultimately resulted in significant losses.
If you don’t want to just read these text interpretations, you can click on the video below to help you understand more quickly about FOB incoterms：
FOB incoterms buyer and seller obligations
The seller bears all the risks until the goods are loaded on the ship, the buyer bears all the risks after the goods are loaded on the ship from the port of shipment.FOB term requires the seller to handle the customs clearance of goods for export.
FOB incoterms formula
- FOB = {{1-[tax rebate rate / (1 + VAT rate)]} × RMB tax-inclusive price} / spot buy price
- FOB US dollar price = [FOB RMB price × (1 + tariff rate)]/US dollar spot buy price (with export tariffs)
FOB incoterms Influencing Factors
At the buyer’s request and at the buyer’s risk and expense, the seller can give assistance to obtain a bill of lading or other transportation documents.
If you want to learn more about Incoterms, the following articles can help you:
(Carriage Paid To) CPT Incoterms Meaning,Working Principle
Disadvantages of FOB incoterms
There are pros and cons to everything. If you use FOB trade terms, you need to pay attention to these:
1.The use of FOB terminology means that the right of transportation and insurance is given to the buyer. Greatly increase the risk of our exporters. Especially when the use of non-L/C settlement, once the foreign buyer credit problems, its risk is simply uncontrollable.
2.Foreign buyers require FOB trade transactions, generally with the designated freight forwarder to maintain a good relationship. They can not only guarantee the delivery of goods, and sometimes also instruct the shipping company or freight forwarder to domestic export enterprises to put forward unreasonable requirements, deliberately make things difficult for us. Even under the conditions of the letter of credit, it is difficult for our exporters to ensure the safe settlement of foreign exchange.
3.The use of FOB terminology, in particular, to guard against foreign buyers and designated freight forwarders collusion, engaged in the release of goods without a single, will make our export enterprises empty. In fact, foreign buyers deliberately through the freight forwarder to domestic fraud cases are not uncommon.
How to deal with these risks of FOB incoterms?
- Provide for the loading time to the port
- Increase the percentage of deposit
- Appointment of freight forwarding company
- Shipper booking
- Take out export credit insurance
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