What is FOB price in Exports and Imports and how it works

Tuesday, September 08, 2015     Category : Inco Terms 

What is FOB in Inco terms of delilvery?

In this article, I am going to explain about the term of delivery - FOB used in international business.

FOB means Freight On Board or Free On Board. If terms of delivery of a transaction is on FOB means, the cost of movement of goods on board of Airlines or on board of ship is borne by the seller. Rest of all expenses to arrive the goods at buyer's premise has to be met by the buyer.

I will explain FOB terms of delivery with a simple example. You are a Machinary seller situated near Mumbai, India. The buyer is situated in a place near New York. You are the seller of goods and you have contracted with the buyer and agreed to sell the goods on FOB, Mumbai price of USD 5300. Here the selling cost of goods is USD 5300 FOB Mumbai. So the seller meets all the expenses to carry the goods to Mumbai port and meet all expenses including customs clearance in Mumbai to get the goods on board to Airlines or On Board to Ship. As I have explained, all further cost to reach the goods to the buyer's place has to be met by the buyer. The buyer nominates the shipping company or airlines and seller ships goods as per buyer's advice. The buyer pays the cost of freight to the shipping company or airlines. Buyer arrange toinsure the goods and pay the cost of insurance.

Detailed articles about Inco Terms of Delivery under export and import of International business  have been mentioned in  separate category – INCO TERMS – in this web site. You can click here to read. 

I hope, I could explain about  FOB terms of delivery used in international trade.  Do you wish to add more information about FOB price in exports and imports?  Share your experience in handling  your export import goods under FOB terms of delivery.

Comment below your thoughts and share your experience about FOB  terms of elivery in international business.

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Hi Andrew! 

My congratulations, your blog is very very helpful (the most helpful information I have found in one blog! Bless you for that).

But I still have a couple of questions; I hope you will be able to help me.

I am dealing and negotiating from about 2 months with a China supplier about fabrics. I will order 500m from a various design. On the end I get the price 3.37$/m CNF London. The price satisfies me and I would like to organize shipping.

But I totally don’t have idea how to start…

What exactly does mean CNF London?

Could you explain me how it is work from beginning step by step? First I have to pay for my goods and after that what?

The supplier advice me to give me a less price on the invoice if I would really pay to lower cost of tax and duty. Do you think is good idea? I know it sounds like a fraud, but I prefer to ask someone who’s know a subject very good.

I would need to pay 1685$ for my 500m of fabrics. What about the rest of cost? How high are the taxes and duties in UK? And when i would need to pay for it.

CNF London does mean that I would need to collect my goods from London port? I am living in London so this will not be a big deal, but how this will work?

I am sorry for so many questions but when I think about all these things it seems to be a nightmare! I hope you will clarify me a little bit what I should do.

Kind regards and many thanks!
Malwina

Hi Malwina,

Thanks for your email.

Ok, let’s start with the basics. When dealing with suppliers from China, you’ll often be offered 3 types of pricing:

FOB – Free on Board (or Freight on Board). This basically means that the cost of delivering the goods to the nearest port is included but YOU, as the buyer, are responsible for the shipping from there and all other fees associated with getting the goods to your country/address.

CIF – Cost, Insurance and Freight. In this case, the price also includes sea freight charges and insurance to deliver the goods to YOUR nearest port. But only to port – from that point onwards, you take the shipment into your hands.

CNF – Cost & Freight (or Cost, no Insurance, Freight). Similar to CIF only this time insurance is not included.

If your supplier quoted you a CNF London price, this means that this price includes shipping of the goods via sea freight to London port. When the goods arrive, you’ll have to organise customs clearance and delivery to your home/office/warehouse.

While the CNF price can look very attractive, keep in mind that there will be other costs involved when your goods arrive in London, such as:

• Customs clearance fee
• Value added Tax
• Import Duty
• Port security charge
• Fuel surcharge
• Docking charge
• Warehouse storage fee
• Etc.

So the CNF price is really just the tip of the iceberg and does not show you the true, FINAL price you’ll pay for products you’re importing.

Also, as you’re new to importing, it will take extra time and be a lot of hassle for you to organise everything at London’s port.

A much better alternative is to use a freight forwarding agent for your shipments from China. These companies will take care of EVERYTHING mentioned above and will deliver the goods to your door without you having to mess around with the customs clearance procedure.

You usually receive an invoice from them once your goods have arrived with all taxes, customs & port fees clearly listed.

I highly recommend you use such a company, at least for your first few importing deals. These freight forwarding companies are very affordable and can actually work out cheaper than if you try to do it all on your own.

My recommendation for UK customers is Woodland Global – a freight forwarder with great customer service, weekly shipments from China and very competitive prices. Get in touch with them to find out exactly how much your order will cost delivered to your door, after all the fees and taxes.

As for showing a lesser value on the invoice to avoid/minimise taxes – BAD, BAD idea! It’s nothing but fraud, never mind the fact that you won’t even be able to get such a shipment through customs as you’ll have to provide a payment receipt to prove the value of the goods.

And furthermore, you wouldn’t be able to properly book such shipments from an accounting point of view as your payments to suppliers wouldn’t match the tax invoices you pay in the UK.

So just keep it safe and play by the rules!

Hope this helps!

Thanks,
Andrew