What Is FOB Destination? Everything You Need to Know
FOB destination impacts buyers and sellers differently. Learn who’s responsible for what in regard to FOB destination terms.
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Free on board or freight on board (FOB) destination holds the seller liable for any losses or damages while a delivery is en route.
It differs from FOB sending point — where the buyer is the liable party.
In other words, the seller is responsible for the items during sending because they pay the sending cost.
You should be familiar with “free on board destination” if you’re in charge of overseas sending on a regular basis.
It can help you better understand who’s responsible for what costs and liabilities throughout the overseas sending process.
Some companies may even use real-time visibility tracking devices to monitor shipments en route to their final destination.
This way, they know exactly when they reach the point where ownership transfers and they assume responsibility.
- FOB destination means the seller pays for sending and assumes all liability while items are in transit.
- Under an FOB destination agreement, the seller owns the items until the buyer gets them at delivery.
- The seller can transfer sending costs to the buyer, but they’re still liable for items until delivery is complete.
- Four additional FOB destination terms come with their own stipulations and rules for financial responsibility.
An example of FOB destination used
Here’s an example of FOB destination in action:
Imagine you’re delivering a order of tables, booths, and chairs to a restaurant owner.
The agreement calls for FOB destination, which means you’re legally responsible for the items until delivery.
Once you drop off all items to the buyer and they accept the delivery, the title of ownership officially transfers and you’re no longer liable.
But the sale isn’t final until you reach this point.
Differences between FOB sending point and FOB destination
So, that’s a brief introduction to FOB destination.
Let’s get into the nuts and bolts of the process, starting with explaining the difference between FOB sending point and FOB destination.
First things first, we’ll explain why these FOB terms are important.
FOB sending point and FOB destination are considered incoterms — or international commercial terms set up by the International Chamber of Commerce (ICC). These terms set trade laws and clarify buyers’ and sellers’ responsibilities during international trade.
This language is a part of the international cost, insurance, and freight (CIF) agreement and applies to goods that travel over waterways.
They impact which party takes on the full responsibility or risk of loss during international sending
The incoterms 2020 include four new terms — and FOB was one of the additions.
All incoterms specify which party is responsible for licensing, customs, and other formalities in sending
To put it simply, incoterms help both sides understand who’s in charge of what so the buyer can get their items and the seller can collect their profits.
As a delivery service, you can properly manage the order and understand who’s responsible for documentation, customs, and other logistics along the way.
Now that we got some housekeeping out of the way, let’s get back to our conversation on FOB terminology.
Some unique accounting rules come into play depending on the sending terms.
Under an FOB sending point agreement, the seller records the sale after the items reach the point of origin or receiving dock.
This is when the buyer’s inventory can be updated.
However, in an FOB destination agreement, the seller won’t log the sale as completed until the goods arrive — and the buyer won’t change their inventory or accounts receivable until this point.
Understanding when the items legally transfer ownership can help you know which steps to take if any issues (such as a damaged item) pop up during transit.
How cost is divided
The responsibility of paying transportation costs usually depends on the type of sending arrangement the buyer and seller agree on initially.
In an FOB sending point agreement, the seller is only responsible for the items while they’re still at the seller’s location.
The buyer becomes liable once the items reach the point of FOB origin or the sending dock.
This means they pay fees like customs and taxes.
If the arrangement is FOB destination, the seller is financially responsible for all costs until the items reach the buyer’s location.
The seller can bill these costs to the buyer in different ways, but they’ll initially pay the fees out of their own pocket (more on this later).
Time when ownership is transferred
A big difference between the various sending arrangements is when ownership of the goods transfers from the seller to the buyer.
In an FOB sending point agreement, the buyer becomes the owner after the goods reach the point of FOB origin.
From this point on, the buyer is responsible for the goods.
FOB destination agreements are slightly different.
In these arrangements, the buyer doesn’t own the products until delivery is complete.
This means the seller is liable for any losses or damages during transit — and the buyer doesn’t become the owner until they get the goods.
The four FOB destination terms
The above information can help you get on the right track toward understanding FOB destination, but there are a few more terms to learn.
We’ll unpack each one below so you aren’t surprised if you find a few extra terms included with FOB destination.
FOB destination, freight prepaid and allowed
So far, the type of FOB destination sending we’ve been talking about is best described as freight prepaid and allowed.
The seller pays all the freight charges and owns the goods while they’re on the move.
Ownership doesn’t change hands until the goods are in the buyer’s hands at the buyer’s destination.
They don’t have to reimburse the seller for any sending transit, or customs charges.
FOB destination, freight prepaid and added
Freight prepaid and added is where things get different.
The seller still pays the upfront freight costs and is liable for the items until the buyer gets them.
The difference is that they’ll bill the customer for all sending charges when they send the buyer their invoice.
In other words, the buyer is responsible for the fees, but the seller is liable for damages until the buyer gets the items.
FOB destination, freight collect
Freight collect is similar to freight prepaid and added — with one big difference.
The seller still asks the buyer to pay the sending cost, but at a totally different time.
If freight prepaid and added is the deal, the buyer pays the sending cost on their invoice.
If freight collect is the arrangement, the buyer won’t pay until they get their items at the final destination.
What difference does this make?
It means the buyer doesn’t have to pay sending costs until they can physically find their delivery.
If the buyer has any questions or concerns about the item’s condition, they can raise them to the seller before ownership officially changes hands.
Although the buyer still has to pay for their sending eventually, they maintain some leverage.
FOB destination, freight collect and allowed
You already know that freight collect means the buyer pays the sending costs when they get the item, but what’s different about freight collect and allowed?
Under this arrangement, the buyer passes the cost onto the supplier by deducting the cost from the supplier’s invoice.
FOB destination FAQs
Still have questions? No sweat. Keep reading for answers to the questions delivery companies most often ask about FOB destination.
Is FOB destination more favorable for the buyer or the seller?
FOB destination is usually better for the buyer.
They don’t have to pay for sending and aren’t responsible for any damage during sending
Since they don’t technically own the items until delivery, they can physically find them over for any damages or concerns before accepting the delivery.
While FOB destination sending is often more favorable for the buyer, it doesn’t mean the seller has to take a total loss.
As you remember from the terms above, you can still bill the buyer for sending costs under certain agreements.
Who pays for sending on FOB destination?
The seller pays for FOB destination since he or she is responsible for the goods during transit.
This is one of the key reasons FOB destination differs from FOB sending point, where the buyer pays sending costs and assumes liability during transit.
Does FOB include customs clearance?
Under FOB destination, the seller pays for export customs clearance since they’re still responsible for the goods.
This means they’re responsible for all processes and charges related to export customs clearance.
This doesn’t mean they can’t choose to bill the buyer later, but they must initially pay the customs fee themselves.
Keep everyone on the same page
The main differences between FOB delivery methods come down to who pays the sending cost and who’s liable for damages while items are on the move.
Knowing about the different FOB delivery methods means you can give information to customers about when they’ll become responsible for their items and when they must pay sending charges.
This can boost customer satisfaction and help keep everyone on the same page.
For more help boosting customer satisfaction, check out Circuit for Teams.
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