Many exporters mistakenly believe that under Free On Board (FOB) terms, their responsibility ends once goods are loaded onto the buyer's designated vessel. However, this seemingly convenient arrangement conceals significant ownership risks that could lead to complete loss of both goods and payment. This article examines the potential dangers of FOB terms in international logistics and provides practical strategies to safeguard your export business.
FOB Terms: Convenience With Hidden Dangers
FOB (Free On Board) terms require the seller to deliver goods onto the buyer's specified vessel at the named port of shipment. While this grants buyers control over transportation arrangements, this authority can be abused, creating multiple risks for sellers.
Core Risks: Loss of Ownership and Unauthorized Release
The primary danger of FOB terms lies in the transfer of ownership. Once goods are loaded, the buyer's designated freight forwarder effectively controls the shipment. If the buyer colludes with the forwarder, or if the forwarder releases goods without proper authorization (known as "unauthorized release"), sellers face substantial financial losses.
The Dual Bill of Lading System
FOB transactions typically generate two sets of shipping documents:
- Master Bill of Lading (MBL): Issued by the shipping company to the freight forwarder, identifying the forwarder as the carrier.
- House Bill of Lading (HBL): Issued by the forwarder to the exporter, containing buyer and seller information.
While exporters receive the HBL, their actual control over goods is significantly weaker than if they held the MBL. Unauthorized releases become particularly difficult to challenge when exporters only possess the HBL.
Ownership: The Lifeline of International Trade
In export transactions, ownership represents not just legal title to goods but also payment security. New exporters should be especially cautious about FOB risks and consider working with experienced freight forwarders rather than sacrificing control to save minor shipping costs.
Additional Complications: Subcontracted Forwarders
When buyers' designated forwarders cannot book space directly with shipping lines and instead subcontract to specialized route forwarders, exporters' control diminishes further. This complicates liability determination when problems arise during transit.
Transport Duration: The Overlooked Cost Factor
Many exporters mistakenly assume transportation becomes irrelevant under FOB terms. However, buyers prioritizing low shipping costs may select slower vessels, extending transit times. This increases capital turnover periods and creates additional risks.
Exchange Rate Volatility and Unexpected Events
Prolonged shipping durations expose exporters to exchange rate fluctuations, particularly for high-value shipments. Extended transit periods also increase vulnerability to unforeseen circumstances like buyer insolvency, raising unauthorized release risks.
Safer Alternatives: CFR and CIF Terms
To mitigate unauthorized release risks, exporters should consider CFR (Cost and Freight) or CIF (Cost, Insurance and Freight) terms. CIF offers particular advantages by including transportation insurance against coordination failures.
Practical Strategies: Six Steps to Reduce FOB Risks
When FOB terms are unavoidable, exporters can implement these protective measures:
- Contract Priority: Negotiate for CIF terms whenever possible to maintain ownership control and ensure full payment.
- Document Selection: Request the MBL from shipping companies to avoid liability confusion between parties.
- Risk Awareness: Exercise special caution when shipping to countries with high unauthorized release rates (e.g., Brazil, Angola, Venezuela). Only release scanned bills after receiving full payment.
- Document Management: Obtain original bills and invoices promptly after shipment (request the MBL for full container loads).
- Shipment Tracking: Monitor transit progress continuously through shipping company websites using container or bill numbers.
- Payment Collection: For installment payments, immediately request balance payments upon receiving bill copies. If payments are delayed, issue formal warnings about potential returns and customs blacklisting consequences.
Conclusion: Manageable Risks Through Informed Choices
FOB terms don't inherently pose insurmountable dangers when properly understood and managed. In international trade, strategic decisions about shipping terms and reliable partners prove more valuable than operational efforts alone. By making informed choices, businesses can navigate global markets successfully while minimizing exposure to preventable risks.