Choosing the right Incoterm is like navigating a ship through open waters—steering the course of a transaction and determining how responsibilities are divided between the buyer and seller.
Two commonly used Incoterms®, Free on Board (FOB) and Free Carrier (FCA), offer distinct advantages and challenges, depending on transport mode and the businesses’ unique needs.
Explore the advantages and difficulties of FCA and FOB to determine the optimal choice for your business.
Knowing when to choose FOB or FCA for your shipping needs ensures seamless shipping, clear communication, and clarifies who takes on risk and cost at each leg of the journey.
What is Free on Board (FOB)?
With Free on Board (FOB) agreements, the seller delivers goods and loads them onto a ship at a predetermined port. The buyer chooses a carrier for the transfer. Once goods are onboard, the buyer assumes risk of loss or damage.
With FOB, the seller covers shipping and fees to the initial port, while the buyer pays transport expenses from the port of shipment to their destination.
FOB works best when shipping bulk and non-containerized goods by sea or inland waterways and when the seller has direct access to the vessel for loading.
However, f the seller will not load cargo onto the vessel, it may be better to choose a different Incoterm, such as FCA.
What is Free Carrier (FCA)?
In a Free Carrier (FCA) agreement, the seller agrees to deliver cargo to a specified location known as the Named Place. The buyer assumes responsibility at this export point and manages the transfer of goods to the shipping carrier.
FCA is versatile for all modes of transport—air, sea, road, or rail—and is ideal for shipping containerized goods. It also allows buyers to negotiate better rates to secure a carrier at a potentially lower price. However, once the shipment is in transit, the buyer bears all risk.
Sellers prefer FCA because it relieves them of managing shipping across international borders.
FOB vs. FCA Incoterms®
FOB and FCA are similar, but there are key differences to pay attention to. Understanding the similarities and differences is vital to ensure the right Incoterm is used.
Similarities
- Customs Clearance. FCA and FOB share similar Customs clearance procedures. The seller handles export procedures and costs in the country of origin, while the buyer handles import procedures in the destination country.
- Loading. With both FOB and FCA, the seller handles export duties and loads goods onto the selected carrier.
- Fees. With both FOB and FCA, the buyer handles import charges and clearance, freight charges, unloading and handling at the destination port, and domestic transport to the final destination.
Differences
- Risk Transfer. With FCA, risk transfers at the seller’s premises when goods get loaded onto a vehicle or at a Named Location once goods are made available. But with FOB, risk transfers to the buyer once goods are loaded onboard a vessel.
- Transport Modes. FCA applies to all transport modes, whereas FOB is limited to sea transport.
Understanding FCA and FOB is crucial for businesses in international trade. This knowledge helps them choose the right Incoterms® for their needs.
The Benefits of FOB and FCA
FOB and FCA are widely used Incoterms®, each offering distinct advantages. Understanding their benefits will help you choose the Incoterm that provides the greatest value for your business.
Benefits of FOB
FOB offers a clear delineation of risk transfer. Risk transfers to the buyer as soon as goods reach the Named Place and are loaded onto a vessel. It also simplifies the process for sellers who are only required to handle the initial transport.
This Incoterm also works well for sea freight, particularly for bulk shipments.
With FOB, the buyer takes charge of the shipping process and can choose their own freight forwarder. Working with one logistics provider improves coordination and oversight during transport. FOB also allows buyers to negotiate favorable shipping rates.
Benefits of FCA
FCA offers great flexibility for containerized shipments because it works with all modes of transport.
This Incoterm also gives buyers ultimate control over the transport of their goods after cargo has been exported from the country of origin. With FCA, buyers control the choice of carrier and timing of shipments. Sellers benefit because they only handle initial transport.
Reliable logistics partners are crucial when using FCA. Buyers rely on shipping service providers to find the best price and transportation solution for their cargo.
The Challenges of FOB and FCA
FOB and FCA come with their own set of challenges. It's essential to be aware of these potential issues before choosing either Incoterm for your contract.
Buyers usually have few disadvantages when using FOB. The additional steps in arranging freight may seem daunting to newcomers or those accustomed to seller-managed shipping. However, the cost savings and increased control usually justify the initial challenges.
When opting for FOB, working with a seasoned provider can help by streamlining transactions for importers.
Choosing Between FOB and FCA for Your Business
Choosing between FOB and FCA is influenced by business characteristics, company size, and cargo type.
With FOB, buyers gain ownership of cargo upon loading and can control their own transport costs. It is ideal for larger companies with in-house logistics capabilities.
FCA benefits sellers by relieving them of risks related to transporting goods. It is ideal for sellers with small- and medium-sized operations or those selling high-value cargo that requires added protection or security.
For buyers seeking flexibility in delivering goods, FCA works well because it supports all transportation modes. This Incoterm also lets buyers select the risk transfer location, be it the seller's premises or elsewhere. On the flip side, FOB benefits sellers desiring control and transparency, with the buyer assuming ownership at the port of origin or shipping terminal.
Ultimately the seller and buyer must reach a consensus on the Incoterm that best meets both of their needs.
Why Consult a Customs Broker When Deciding Incoterms®?
Choosing between FCA and FOB can be complex. Hiring a Customs broker can help buyers and sellers select and correctly apply the appropriate Incoterms®.
Although a Customs broker can make things easier, it's important to grasp the distinctions between FCA and FOB. Take a moment to familiarize yourself with both.
For any remaining questions about FCA or FOB, Incoterms® in general, or to find a logistics partner for your international shipping needs, contact AN Deringer. Our mission is to take care of the details of global shipping to keep companies focused on their core business.
