Many people, even those in the profession of Federal contracting, are not aware of the meaning of FOB Origin. In the shipping industry, this is an important definition to understand. Understanding the different titles involved in the shipping process helps individuals to protect their company. The following offers a simple guide into FOB Origin and what it can mean for your business.
What Does FOB Stand For?
There is a great deal of confusion when it comes to FOB and its meaning. FOB simply stands for “Free on Board”. FOB is the exact point where a seller gives up ownership and the buyer accepts ownership of the products they purchased during a specific transaction.
There are a couple of types of FOB Origin. Once you fully understand these terms, you will be able to better understand shipments in Federal contracting.
Two Types of FOB Origin
There are two main types of FOB Origin when it comes to the Federal contracting space. Every client or vendor should have their FOB terms fully outlined in their purchase order. In addition to the purchase terms, the shipping terms are equivalent in importance. The following offers detailed information on the two different types of FOB and how they could impact your business.
1. FOB Origin: Freight Collect – Freight Collect is a FOB term that means the buyer is responsible for all freight charges. Not only is the buyer responsible for freight payment, but they are also held responsible for any risks. Should a loss occur, the buyer would be held responsible for filing any claims on the lost merchandise.
2. FOB Origin: Freight Pre-Paid – Freight Pre-Paid means the buyer takes the legal responsibility of paying all freight charges and handling any freight claims exposure that may arise due to losses or damages occurring in the shipping process.
When shipping or accepting purchased goods, having the right FOB Origin terms in place will protect your business. Having the right terms in place can put your business at a competitive edge. There are some different ways FOB terms can affect your business and it is important to explore these and gain a full understanding.
How Can FOB Terms Affect Your Business?
There are many risks in the transport of purchased goods. If the risks are not properly mitigated, your company could suffer. FOB terms typically are only involved in large shipments for companies. Having a strong understanding of the terms will help you to understand who holds the liability in a shipment.
A lack of understanding of FOB terms could be more than a simple headache. Not only do business owners need to be aware of these terms, but their accountants do, as well. When an accountant follows FOB terms, they can keep records of the precise moment a transaction takes place.
Your company’s shipping terms are vital for protecting your bottom line. While companies have the option of choosing either FOB term, most will benefit from FOB Origin, which removes their liability as soon as the freight becomes transferred to the shipping company.
If you do not use FOB Origin, your company will be held liable for any damages that occur during the shipping process. While this may not seem like such a big deal if you deliver your own shipments, a third-party shipping provider could be risky.
Should you choose to use FOB Destination, you will need to make sure you purchase insurance to cover any damages that occur while the items ship to their receivers. Failure to choose the right FOB or purchase insurance could lead to big liabilities that bring down profits and negatively affect your bottom line.
Although it is not their responsibility, many companies choose to take ownership of any shipping issues to keep their customers happy. This will be a policy you will need to carefully consider based on your ability to financially cover damage or purchase insurance coverage.
Protect Your Company with a Bill of Lading
If your company uses third-party shipping providers like UPS or FedEx, a Bill of Lading will help. A Bill of Lading is a legal document that is signed along every step of the way in the shipping process. It is first signed by the seller when transferred to the carrier. The carrier signs the document when the recipient receives the freight. The Bill of Lading offers you a legal receipt in case any buyer disputes arise.
Fully understanding FOB Origin terms is essential for running your business. Make sure you protect your bottom line by clearly outlining your shipping terms with all clients and buyers. If you do not explicitly outline your FOB terms, your company will be at risk. FOB terms are not that difficult to understand. Just remember that origin means the buyer takes ownership from the moment the freight leaves their company.