What is FOB (free on board)? – Learn more about the value of the merchandise by boat

The FOB agreement is one of the most used in international product sales deals, especially by new and small companies. This article explains what FOB means or Free On Board and how the delivery of the merchandise is carried out in said modality. The obligations of buyers and sellers when using the FOB are also specified.

What is FOB and CIF?

In the world of international trade and transport, each buyer must carry out a careful search to find the best prices. In this sense, when making international purchases and imports, it is not only necessary to focus on the costs of the products, but also on the fee charged by the companies that are in charge of the shipment of objects. Thus, there are several types of agreements in the sales processes in which great benefits are obtained, one of them is the FOB, which focuses on the maritime transport of the merchandise.

The word FOB is an acronym that is used in international trade to describe some agreements that are reached in a sales process. The initials represent the abbreviation of the title ‘Free On Board’ which translates into Spanish as ‘free on board’, although it is also called ‘free on board’ or ‘agreed cargo port’.

The FOB agreement is an incoterm, which is a set of terms that represent a voluntary agreement between the parties involved in an international sale. The word incoterm is also an acronym that describes the title ‘international business terms‘ or international trade terms. These agreements are frequently used to clarify some points about the transaction and delivery of the merchandise. There, the buyer, the seller and the others involved reach an agreement on the cost of the transaction or the responsibility of each of the people in the process.

On the other hand, a CIF is another agreement that is classified as an incoterm or international trade term. The word CIF is used in merchandise import processes to abbreviate the title ‘Cost, Insurance and Fright’, that is, ‘cost, insurance and freight, port of destination agreed’.

The CIF agreement differs from the FOB in the person to whom responsibility for the merchandise is assigned, in this sense, in a CIF agreement, the responsibility for the insurance and the risks of the articles falls on the buyer from the moment of delivery of the product. So, there is already a guarantee that the packages are in good condition. This is one of the most used agreements in agreements of a freight forwarding or maritime transport of products nature.

Examples of FOB value

In a transaction where the FOB is not applied, the selling entity sets a price for the product plus the expenses for land freight, cargo, insurance and sea travel. While, with the FOB, the company that sells does not assume so many expenses, since it only pays for land transport and the uploading of the packages to the ship, so the cost of this operation decreases.

Advantages of Free on Board

Making exports and imports through the FOB or free on board method produces advantages both for the buyer and for the company that makes the sale. In the case of companies or businesses that offer services and products internationally, the greatest advantage of FOB is cost savings. In this sense, said institution should only assume the transfer to the port and the loading of the merchandise inside the ship.

It should be noted that most companies that offer international products have a good structure and assets, so they must have cars or trucks that are in charge of doing that freight, so the saving is maximum. Another advantage is that you do not have to pay for insurance that covers the maritime trip.

What is the FOB value?

When talking about FOB value, reference is made to the cost or price of transport that takes the merchandise to the determined point of shipment. It is the value that a car or truck charges to transport the items by land to the port. The FOB value also includes the price stipulated by the agency for load the products to the ship that will serve as maritime transport in the international trip.

In this way, the FOB value is the full cost of the land transfer plus the loading of the merchandise on the ship, this amount is paid by the seller of the product as stipulated in the obligations of the FOB agreements. However, the freight of maritime transport is not part of this value.

Advantages of the Incoterm FOB (Free on Board)

In the case of buyers, they also acquire some advantages when using the FOB method as a transitory agreement for the merchandise, since transfers can be sought cheaper or with stopovers that reduce the total cost of the operation, although the negative part is that you must take out travel insurance.

Obligations of the seller under the FOB incoterm

When making a sale or an international deal, each one of those involved in the transaction acquires obligations and responsibilities. In this sense, the FOB agreement stipulates said responsibilities and specifies the steps to follow so that the operation is carried out in a good way. Thus, in the FOB agreement, the seller does not have as many obligations as in a CIF incoterm.

  • Once an agreement is reached, the seller must prepare the merchandise for delivery to the buyer. Therefore, he must pack, pack and mark the parcel.
  • Transport the products to the port where the ship or ship designated by the buyer is located. The seller must pay this transfer and the cost of loading the items onto the ship.
  • also have to provide the necessary documents such as the contract, invoices, list of packages or any other that the buyer requests and that customs requires.
  • One has to make a notification to the person who buys to inform that the merchandise is on the ship.
  • Finally, you have to do the export office with its respective documentation.

Obligations of the buyer under the FOB incoterm

The person, company or entity that acquires the products also has some responsibilities in an FOB agreement. Some people claim that this agreement is dangerous for the buyer due to the amount of risks and obligations that are assumed.

  • As in any transaction, the buyer must pay for what he bought as stipulated in the contract.
  • Likewise, whoever purchases the products must hire and pay expenses of marine transport, which includes the logistics hub. If you wish, you can also contract insurance to safeguard the merchandise during the trip, since, from the moment it is loaded, it assumes the risks of damage.
  • You then need to receive the packages, where you again bear the risk of any potential damage. Responsibilities include customs import clearance and transfer expenses to the final destination.

What is FOB in accounting?

In accounting, the abbreviation FOB means the same as in international trade, since it represents the export agreement and transfer of responsibilities in shipments. However, here it focuses on the costs of operations, that is, how much money each of those involved in the transaction must pay.

Who pays the FOB freight?

In the Free on board agreement or free on board there is a division of responsibilities regarding the payment of the freight or transport of the merchandise, since both the company that sells and the buyer must make a payment. The seller pays the land transportation charge, in addition to the process of loading the product to the ship, while the creditor pays the maritime transport with your insurance travel and the final office at home.

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