08 Disadvantages for seller against FOB terms of delivery (2024)

FAQs

What are the disadvantages of FOB to seller? ›

One of the main disadvantages for seller under FOB terms is that the exporter does not have any control over main carriage, import clearance and on carriage of goods to final destination. The tracking of shipping details is depended with the buyer as he undertakes main carriage and on carriage contract.

Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.

Free On Board – Advantages and Disadvantages

FOB is popular amongst both – buyers and sellers. This is because it gives both parties control over the cargo as long as it is in their territory. However, in such an arrangement, buyers generally get more control over the logistics and shipping costs.

Free on board destination indicates that the seller retains liability for loss or damage until the goods are delivered to the buyer. FOB shipping point is usually paid for by the buyer, while FOB destination is usually paid for by the seller.

Most buyers choose FOB because it's arguably the most affordable or cost-effective option. Under the FOB terms, buyers do not usually pay the higher fees that CIF protection plans incur. With Free On Board, the buyer has more flexibility and control of the terms, the cost, freight planning, and more.

Problems with FOB

It creates confusion for contractual stakeholders in the event of a dispute. Such disputes are prone to confusion when the parties misunderstand the nature of the Incoterms FOB and related contracts such as contract of sale, contracts of carriage, and letter of credit.

FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete. The buyer owns the product en route to its warehouse and must pay any delivery charges.

Under FOB shipping terms, the seller is responsible for all costs involved in the process up until the goods are on a vessel at the designated port. Once goods have been loaded onto the vessel the buyer is responsible for any costs and risks involved in the onward shipment.

When is the transfer of risk with FOB? With Incoterm FOB, the risk passes to the buyer at the moment the goods are brought on board the ship. This means that the seller has fulfilled his obligation to deliver.

In FOB shipping point, the seller pays for the shipping costs to bring the goods to the shipping point. The buyer is then responsible for paying the shipping costs to take possession of the goods.

Who pays for FOB delivered? ›

If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment.

There are two types of FOB, which are FOB destination and FOB shipping point. The type of FOB to be used is typically designated in a customer's purchase order, and is also stated on the supplier's invoice to the customer.

Advantages of FOB for a Seller

FOB is good for a seller as once the product leaves the warehouse the shipment is the responsibility of the buyer. If the shipment is damaged or lost the buyer will need to claim back on it, while the seller considers the deal done once it leaves their premises.

Key fobs are more secure than keys.

Key fobs provide the same function as traditional keys but offer additional security. If a fob is lost or you wish to deny entry to someone (a former employee or tenant), you can easily cancel access on that particular fob.

Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.

If the seller is not a merchant, the risk of loss passes when the seller has tendered delivery. If the seller is to ship the goods (FOB shipping point), risk of loss passes from seller to buyer on proper delivery to an independent (for-hire) carrier.

The buyers must handle all of the claims and damages, assuming all related costs. Note that a freight hauler or shipping company is still liable for any damage caused in transit. However, in the case of FOB Origin, the carrier would work solely with the buyer and the buyer's insurance to settle any claims or disputes.

Buyers generally consider FOB agreements to be cheaper and more cost-effective. That's because they have more control over choosing shippers and insurance limits. CIF contracts, on the other hand, can be more expensive. Since the seller has more control, they may opt for a preferred shipper who may be more costly.

Examples of FOBs in the Usage

FOB shipping destination, freight prepaid by the seller – The seller pays all the cost, and the buyer owns responsibility only after receiving the shipment. The buyer will not pay any shipping costs.

Primary tabs. Free on board, often abbreviated as “F.O.B.,” applies to the sale of goods and indicates that purchased property will be placed on board a vessel for shipment at a designated place without expense to the buyer for packing, potage, cartage, etc.

What are the disadvantages of shipping? ›

The risk of loss or damage to the goods passes from the seller to the buyer at different stages depending on the Incoterms® chosen. For example, in EXW, risk passes from the seller to the buyer when goods are ready for despatch. This does not mean, however, that title to the goods has transferred to the buyer.

FOB (Free On Board): A Definition

This Incoterm is not commonly used; U.S. companies that choose it often misuse the term because they confuse it with the domestic term FOB. In addition, this term can only be used when the goods can be delivered directly to the point where they can be loaded upon the vessel.

There is a high risk of accidents and breakdowns when using road transport for logistics. So, this makes motor transport not a very reliable option in comparison to rail transportation.

Some disadvantages of air freight are: High Costs. Limited Carrying Capacity. Unfit for specific products.

Here is how the process of FOB shipping works: The seller and the buyer both decide the terms of the contract and modes of transportation. Once the terms of the FOB shipping contract are decided, the supplier will load the goods onto the vehicle and clears the goods for export to the port of destination.

A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation. However, the disadvantage for the buyer is the lack of control over the shipment including shipment company, route and delivery time.

Under FOB contracts, the buyer is responsible for shipping and other costs, as well as insurance as soon as the goods are loaded onto the vessel and during the voyage. FOB contracts are generally more cost-effective because buyers have more control over shipping and insurance.

In FOB shipping point, the seller pays for the shipping costs to bring the goods to the shipping point. The buyer is then responsible for paying the shipping costs to take possession of the goods.

What is the difference between FOB seller and FOB buyer? ›

In a FOB shipping point contract, the seller transfers any title of ownership to the buyer upon the product leaving the seller's location. The buyer then has full ownership. In a FOB destination sale contract, the buyer may not receive the title of ownership until the product reaches the buyer's location.

FOB freight collect and allowed specifies that the buyer must pay for the freight transportation costs. However, the buyer deducts the cost from the seller's invoice. The seller is responsible for the goods because the seller still owns the goods during transit.

The term FOB shipping point is a contraction of the term "Free on Board Shipping Point." It means that the buyer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier's shipping dock.

Risk of loss is the allocation of responsibility for covering the Risk of damage to or loss of goods after a sale has been completed, but before delivery. If the seller bears risk of loss during transport, the seller has a responsibility to provide substitute goods should the goods get lost or destroyed in transit.

Cost reimbursable (or Cost Plus) Cost reimbursable (CR) contracts involve payment based on sellers' actual costs as well as a fee or incentive for meeting or exceeding project objectives. Therefore, the buyer bears the highest cost risk.

Under the FOB Origin, the risk of damage or loss transfers from the seller to the buyer when the goods are loaded onto the transporting vessel at its origin port. This means that any damages, losses, or delays incurred during transit will be borne by the buyer.