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What are FOB and FCA terms?
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Why are FOB and FCA terms confusing?
3
How to choose between FOB and FCA terms?
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How to avoid mistakes with FOB and FCA terms?
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How to learn more about incoterms and trade terms?
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Here’s what else to consider
Incoterms are a set of rules that define the responsibilities and risks of buyers and sellers in international trade. They are essential for avoiding disputes, delays, and extra costs in export contracts. However, many exporters make common mistakes with incoterms and trade terms that can jeopardize their deals and profits. In this article, you will learn how to avoid confusion between FOB and FCA terms, which are often misused or misunderstood by exporters.
Key takeaways from this article
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Specify terms clearly:
Ensure FOB (Free On Board) or FCA (Free Carrier) terms are explicitly stated in your export contracts. This clarity helps prevent misunderstandings and lays out specific responsibilities for both parties in international trade.
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Continuous learning:
Dive into online courses, join trade-related LinkedIn groups, and subscribe to relevant journals. Staying informed about the latest developments in Incoterms ensures you're always equipped to navigate export contracts effectively.
This summary is powered by AI and these experts
- Lila Landis, LCB CUSECO® CCEP-I Global Compliance Leader and Executive…
- Success Letsoalo Continuous Improvement Specialist @ AB…
1 What are FOB and FCA terms?
FOB stands for Free On Board, which means that the seller delivers the goods to the buyer when they are loaded on board the vessel at the port of shipment. The seller bears all the costs and risks until that point, and the buyer takes over from then on. FCA stands for Free Carrier, which means that the seller delivers the goods to the buyer when they are handed over to the carrier or another person nominated by the buyer at a named place. The seller bears all the costs and risks until that point, and the buyer takes over from then on.
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2 Why are FOB and FCA terms confusing?
One of the main reasons why FOB and FCA terms are confusing is that they are often used interchangeably or incorrectly by exporters. For example, some exporters use FOB terms for containerized shipments, which is not appropriate because the seller cannot control the loading of the container on board the vessel. In this case, FCA terms should be used instead, as the seller can deliver the container to the carrier at the terminal. Another reason why FOB and FCA terms are confusing is that they have different implications for the insurance and customs clearance of the goods. For example, under FOB terms, the buyer is responsible for arranging and paying for the insurance and customs clearance of the goods from the port of shipment, while under FCA terms, the seller may be required to assist or cooperate with the buyer in these matters.
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It should be noted that these are only 2 of several incoterms (11 in 2020 update) available. FCA and FOB generally refer to terms where the shipper delivers to the port and the buyer is responsible to the rest of the transit. Both terms have the seller responsible for export clearance and the buyer responsible for import clearance - though, due to the nature of customs clearance, cooperation between the two parties is always appreciated to ensure necessary information is available. It is worth mentioning that while incoterms are standardized, they can always be modified to better fit your supply chain requirements - just be sure that both parties sign off on the modified terms.
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FOB is also a commonly used term for U.S. domestic shipments under the Uniform Commercial Code (UCC), but has a completely different meaning than FOB as an Incoterm. Many sellers and buyers improperly use FOB as an Incoterm because of this confusion with the UCC term.
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The export clearance isn't really a point of confusion. Under both FOB and FCA the seller is responsible for the costs of export customs procedures. Only under EXW would the buyer assumer the cost of this. FOB is absolutely fine for containerized freight however, if as a seller you really don't want to assume the risk of the loading onboard the vessel or while the container sits at the terminal, or even the terminal costs, you could agree an FCA term and still deliver to the named port. Another good compromise is FAS (Free Alongside Ship). Buyers who prefer "F" terms generally do not like to assume the costs of origin terminal fees so it's a great compromise where the seller assumes terminal costs, but no risk in the lading of the vessel.
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There are couple of issues to consider in order to avoid confusion. Under FCA, the seller must make the goods available at the agreed location, this can be at the seller’s premises or the port of origin. The moment the goods are delivered and available, the risk is then transfered to the buyer, which means he is then liable for loading the goods into the vessel.Whereas under FOB, the seller’s responsibility goes one step further, he must also load the goods on a vessel that is selected by the buyer. The risk is then transferred from the seller to the buyer at the moment when the goods are loaded to the vessel. FOB is not suitable for containerised cargo but FCA is, it is even recommended especially for container shipping.
Like Like Celebrate Support Love Insightful Funny - M. Irsan Trucking Company Owner, Logistics and Project Cargo Moving and Distribution Expert | Economics Management
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Fob for Breakbulk vs FCA for Containerize, shipping is logically put responsibility between buyer and seller, determined the logic is that simple
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3 How to choose between FOB and FCA terms?
When deciding between FOB and FCA terms, there are a few factors to consider, such as the mode of transport, the type of goods, the preferences of the parties, and the market practices. Generally speaking, FOB terms should be used for non-containerized shipments, such as bulk or break-bulk cargoes, where the seller can supervise loading and obtain a clean bill of lading. On the other hand, FCA terms should be used for containerized shipments and multimodal transport, where the seller can deliver the goods to the first carrier at a named place. Additionally, air shipments require FCA terms since the seller can deliver the goods to the carrier at the airport of departure and obtain an air waybill as proof of delivery.
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4 How to avoid mistakes with FOB and FCA terms?
The best way to avoid mistakes with FOB and FCA terms is to clearly specify and agree on them in your export contract. You should also use the latest version of the incoterms, which is currently Incoterms 2020, published by the International Chamber of Commerce. You should also avoid using vague or ambiguous terms, such as FOB airport, FCA port, or FCA free carrier, which can cause confusion or disputes. You should also make sure that you understand the obligations and risks of each term, and that you comply with them accordingly. For example, if you use FOB terms, you should ensure that you load the goods on board the vessel and obtain a clean bill of lading. If you use FCA terms, you should ensure that you deliver the goods to the carrier or the buyer's nominee at a named place and obtain a receipt or a waybill.
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5 How to learn more about incoterms and trade terms?
If you want to learn more about incoterms and trade terms, you can consult various sources of information and guidance. The official website of the International Chamber of Commerce is a good place to start, as it provides the full text and explanations of the Incoterms 2020 rules, as well as other resources and training courses. Additionally, the World Trade Organization’s website offers information and advice on trade-related issues such as tariffs, trade agreements, dispute settlement, and trade facilitation. For further guidance, you can also look up your country's trade promotion agency or chamber of commerce website for information and support on export procedures, regulations, markets, and opportunities. Lastly, you can find information and requirements on import procedures, duties, taxes, licenses, and documentation from your buyer's country's customs authority or trade ministry website.
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- Success Letsoalo Continuous Improvement Specialist @ AB InBev | Process Improvement
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More ways to learn more about incoterms & trade ; 1. Participate in online communities/ groups on LinkedIn related to international trade2. Complete online courses on trade and logistics on platforms like LinkedIn Learning3. Subscribe to magazines and journals which feature updates on Incoterms and trade 4. Look for free Virtual workshops or seminars
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Lila Landis, LCB CUSECO® CCEP-I Global Compliance Leader and Executive | I build global compliance programs for today's business risk environment
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It’s important to remember that Incoterms never dictate title transfer or revenue recognition. For revenue recognition, your Finance team should consider the transfer of risk from the Incoterm as part of their analysis to determine the proper revenue recognition point.
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