FOB and CIF terms are used in international trade in relation to shipping when goods enter the national borders. These terms are used to decide when the goods become the buyer’s property from the seller’s property and who is liable for costs and risks associated with goods in transit.
Meaning of FOB
FOB is free on board, also known as freight on board. It is a term commonly used for international shipping. It signifies a transportation term used to indicate that the selling price of the goods includes delivery at the seller’s expense only up to a specified point. The responsibility for shipping is that of the buyer as soon as the goods leave the specified point. Predominantly, these terms are used in commercial invoices.
Components of FOB
There are two types of free onboard freight: free onboard shipping point and free onboard destination. The costs associated with FOB include transportation of goods to the port, loading of goods, marine freight, insurance, unloading of goods at the destination port and transportation cost up to the final destination.
The FOB destination costs are collected in several ways. The FOB location terms, origin and destination, are qualified by modifiers. The modifiers decide the payment of transportation charges. The most common three modifiers are:
- Collect- The transportation charges are collected from the buyer.
- Prepaid and add- The seller has to pay the transportation charges in advance, but the buyer gets these charges reimbursed by adding the same to the invoice.
- Prepaid and allow- The seller prepays the transportation charges. He can include the same in the contract price.
FOB Shipping Point versus FOB Destination
FOB shipping point means the ownership of the product is transferred to the buyer from the point it leaves the seller’s place. Both delivery and custom inspection are the responsibility of the buyer. The seller books his sale at the time the goods leave his place.
In the case of a FOB destination, the ownership of the product is transferred from the seller to the buyer only upon receipt of goods at the buyer’s place. The goods should arrive in good condition.
FOB versus CIF in Invoice
Both FOB and CIF are terms used in international shipping agreements. The difference between the two depends on who bears the responsibility of the goods in transit.
| CIF | FOB |
|---|---|
| CIF stands for cost, insurance and freight. | It stands for free on board. |
| Under the CIF agreement, the reseller’s responsibility is that of goods in transit until the buyer receives the goods. | Under FOB agreements, the responsibility of the goods in transit is that of the buyer. |
| It is considered an expensive option for the buyers because the seller selects the forwarder of his choice, which may be costly and may even charge more to increase profits. | It is considered a cheaper option for the buyer because he can select the forwarder of his choice and may even negotiate to get the best price. |
| Here the seller earns the advantage. | Here the buyer earns the advantage. |
Conditions when FOB value chosen for import-export
FOB value is generally selected by buyers who are familiar with international trade. Such buyers have their logistics and forwarding agents at the port where goods are to be imported. The seller is just responsible for sending the goods to the nearest port of delivery. From this point, they are considered as delivered by the seller.
The most significant advantage of selecting FOB is that the buyer can negotiate for freight services and get the best price. In international trade, it is best to buy FOB and sell CIF.
Example of using FOB in an invoice
(1) FOB value = ex-factory price + other costs
Other costs include packing charges, transportation charges up to the port of loading and custom clearance charges.
Let us take an example,
Quantity of goods sold= 100 kgs
Rate = Rs.25 per kg
Total value = Rs.2,500
Other costs:
Packing charges= Rs.1,000
Transportation charges= Rs.500
Custom clearance charges= Rs.500
Total other costs= Rs.2,000
FOB price= Rs.4,500
(2) Ex- factory price= Rs.1,00,000
Transportation charges up to the customs port= Rs.5,000
Contingency insurance= Rs.1,000
Custom clearance charges= Rs.5,000
Loading charges on the ship= Rs.5,000In this case, FOB charges= Rs.1,16,000 (transportation charges up to customs + customs clearance + unloading charges + loading charges + insurance)
