The Free Carrier (FCA) and the Free on Board (FOB) are two Incoterms that may initially sound very similar. But in reality, they are two very different classifications that may confuse a new importer\trader. If you want to learn about the FCA, the FOB, and the difference between the two classification Incoterms, this blog post covers you.
Before diving into the details of the two classification terms, let’s quickly talk about how these two terms came into being.
The Creation of FCA and FOB Terms
Since the trading of goods happens every single day in the world, this creates a need for a standard or classification that can explain a certain set of rules. These include whose responsibility is the delivery of goods, which country’s laws apply to the goods in case of international trade, and so on.
To fulfill this need, the International Chamber of Commerce established the Incoterms which stands for International Commercial Terms. There are 11 Incoterms, and FCA and FOB are part of these classifications.
What is FCA (Free Carrier)?
The FCA, by definition, is a trade term that dictates that the seller of goods is responsible for delivering those goods to the designated carrier or agreed-upon location (such as a warehouse or terminal) specified by the buyer. In simple terms, the delivery of goods from the seller is marked as completed once the seller has packaged, verified, and transported the goods at the location specified by the buyer in the contract.
Note: The seller has to agree to the specified location to form a contract.
There are two major things to emphasize; Otherwise, most new importers/traders need clarification.
- All transportation modes can be included in the FCA terms.
- The word “Free” in FCA refers to the buyer’s non-obligation (or, in reverse, the seller’s obligation) to transport the goods to the named place.
- Any damage incurred to the goods during the transport to the named location will be compensated by the seller at his own cost.
- The seller can charge the transportation fee in the contract, and the buyer must agree to form the contract. Normally suppliers add this cost to their product value and do not list this cost separately.
- The seller can also choose the location if the buyer doesn’t provide a location.
- Lastly, most new traders ignore and then find themselves confused about the fact that the named location or the drop-off location can also be the seller’s premise.
When the goods are transported safely to the named place, the responsibility of handling and transporting the goods further is shifted to the buyer.
The image above explains the responsibilities of both buyer and seller in an FCA term. The seller is obligated to transport the goods to the port of origin (the port from where the goods will be exported). These might include the following responsibilities:
- Packaging\Verification of Goods
- Loading of Goods
- Transport from the Seller’s premise
- Custom Export (Export Clearance) at the port of origin
But, right before the export, the responsibility for cost and risk is shifted to the buyer. This means the buyer is responsible for managing and loading the goods onto the carrier, the freight, and the import procedure at the destination port.
Now that we understand the FCA better let’s look at what is free on board.
What is FOB (Free on Board)?
As mentioned before, the FOB is quite similar to FCA as it also defines the responsibilities of the seller and buyer during a trade. The Free on Board defines that the seller is responsible for transporting the goods to the port of origin and loading goods onto the carrier/vessel. Within FOB, the seller is responsible for handling, cost, and risks of the goods until the goods have crossed the ship’s rail. However, unlike the FCA, which includes all modes of transport under its umbrella, the FOB is only applicable for inland waterways transport and sea transportation.
Take a look at the given image below:
From the image above, you can see that the seller is responsible for transporting the goods from the seller’s warehouse (after packaging and verification) to the port of origin and loading the goods to the carrier. This includes paying the custom in the country of origin.
Once the goods are loaded onto the carrier (when the goods have crossed the ship’s rail), the seller’s responsibility is marked as completed, and the goods become the buyer’s responsibility.
Note: Even though the original purpose of the FOB Incoterm was meant for sea and inland waterways transport. However, nowadays, it can also be used in air cargo in actual business on informal occasions.
FOB Origin and FOB Destination
In certain scenarios, the FOB term can be specified even further. Thus making two categories of FOB. The first of these is the FOB Origin. In this, the seller, as mentioned above, is responsible for safely delivering the goods to the freight in the country of origin (the country from which an export is made). The seller has to pay the export clearance fee and the cost of loading the goods into the freight carrier. The buyer pays the transportation cost of the carrier\freight.
The FOB Destination, on the other hand, puts the responsibility of the cargo/goods on the seller until it reaches the destination port (in the country that is getting imported). In addition to the cost of export customs clearance and loading, the seller has to pay the freight/carrier transportation fee and hold responsibility for any damage to the goods. On the other hand, the buyer has to pay the import custom clearances fee, and any transportation of the goods to their final destination is on the buyer.
In short, the change of responsibility in FOB Origin is made at the port in the exporting country, and in the case of FOB Destination, it is shifted to the port of the importing country.
Now let’s discuss the differences between the two terms.
Differences Between FCA and FOB?
The biggest difference between these terms, the FCA and the FOB, is the point where the risk responsibility is transferred from the seller to the buyer. In the case of FCA, this point is when the goods are transported to the named location by the seller. As soon as the cargo is delivered to that location, it becomes the buyer’s responsibility.
In FOB, this point is on the carrier or freight, which means it becomes the buyer’s responsibility as soon as the cargo is safely loaded onto the carrier\freight.
Mode of Transportation
In the FCA, all modes of transportation are allowed (sea, land, and air). However, in the case of FOB, delivery to only inland waterways or sea shipments is allowed.
Type of Cargo
This is not primarily a difference between the two incoterms but more like a clarification. There is a huge misconception that the FCA can be used for all types of cargo, whereas the FOB can only be used for non-containerized cargo. In reality, the FOB can also be used for containerized cargo. In fact, in some countries, FOB is much more popular than FCA for Container shipments.
Cost Allocation
Free On Board (FOB): In this arrangement, the seller takes care of all the expenses involved in transporting the goods until they are loaded onto the vessel at the port of shipment. This encompasses tasks like handling export documentation, managing customs clearance, and settling any other fees for delivering the goods to the port and the costs associated with loading the goods on the carrier. Once the goods are on board the carrier, the buyer must bear freight costs, insurance, unloading, import clearance, and any other expenses incurred thereafter.
Free Carrier (FCA): The seller takes on the responsibility of delivering the goods to the specified carrier or the mutually agreed-upon location, and they also handle the expenses associated with export clearance. Once the goods have been handed over, the buyer must bear the costs of loading the goods in the carrier, transportation costs of the carrier, insurance of goods, the freight, and any expenses related to the import process.
Quick Overview of the Difference
Well, at this point, the basics of the difference between the two classifications (Incoterms) is done. Therefore, quickly go through the table given below:
| FCA (Free Carrier) | FOB (Free on Board) | |
| Definition | The seller delivers the goods to the carrier or named location. | The seller loads the goods onto the vessel at the port of loading. |
| Transfer of Risk | When goods are handed over at the agreed location. | At the ship’s rail at the port of loading. |
| Transportation Modes | Applicable on all modes (sea, air, road, rail). | Only in sea and inland waterways. |
| Cost Allocation | Seller to agreed locations. After that, the buyer’s cost. | Seller’s cost until the loading. Buyer for subsequent costs. |
| Loading & Unloading | Seller only delivers. The buyer needs to load and unload. | The Seller loads the goods, and the Buyer unloads the goods. |
Pros and Cons of FCA (Free Carrier)
In the case of the Buyer, the FCA puts more responsibility on the buyer than the FOB.
In the case of the Seller, it is an ideal Incoterm, as it reduces the responsibility of the seller. And most of the time, the named location is near the port of loading, where the goods have to be loaded into the buyer’s transport. This ultimately means that the seller can also save on the cost of transport.
Pros and Cons of FOB (Free on Board)
In the case of the Buyer, FOB is the preferred choice, as It takes away some of the responsibility from the buyer and puts it on the seller. However, a drawback for the buyer while under the FOB Incoterm is the limitation of only being able to use the FOB for sea freight.
Talking about the Seller, it simply puts more responsibility on the seller and makes the seller more viable to any damage dealt to the cargo before it has been loaded into the carrier.
That sums up almost all the basics of these two Incoterms. Next, let’s look at some information that helps a novice imported\trader a lot.
Which is Better When Importing From China?
In General, it is all up to the buyer and his requirements and the type of cargo that is being imported from China. Even though you do have the option of going with an FCA agreement while importing goods from China, it would still be a good option to go with FOB. The reason for this might be different from what you think.
China is rather efficient when it comes to international trade, and they primarily rely on one major Incoterm, which is the FOB. Therefore, it is often a wise decision to let things go the way they work smoothly, and when importing from China is FOB.
Let’s explain why FOB is so popular.
Benefits of FOB and Reason for Popularity?
Various benefits make the FOB incoterm so widely popular. Here’s why:
- Buyers and sellers widely favor FOB shipping due to the level of control it grants each party over the cargo while it is within their territory. One major advantage for Buyers when opting for FOB Incoterms is the ability to exercise greater control over logistics and shipping costs, enabling them to select their preferred shipping methods.
- Under FOB, buyers can choose their freight forwarder for the entire shipment, eliminating the need to rely on the supplier for any or all of the freight process. This streamlined approach minimizes back-and-forth communication and potential miscommunication between two shipping companies, as the buyer only needs to engage with a single company throughout the transportation process.
- Another benefit of FOB Incoterms is their cost-effectiveness, empowering buyers to search for the most favorable shipping rates. While the transfer of risk occurs when the goods are securely loaded onto the shipping vessel, the buyer’s forwarder assumes responsibility for the entire transportation process.
- In the case of FOB Incoterms, sellers are responsible for arranging the trucking service and ensuring export customs clearance to transport the goods to the port, thus guaranteeing the safe and smooth departure of the shipment from their territory to fulfill their liability. Both sellers and buyers share the common goal of proper, safe, and smooth shipment handling, regardless of the specific responsibilities assigned, as this fosters a positive foundation for future business interactions between them.
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Summary
Understanding the difference between FOB and FCA is crucial for novice importers. FOB is suited for sea and inland waterway transportation, while FCA applies to all modes of transport. FOB involves the seller loading goods onto the vessel, while FCA does not. Both terms transfer risk and costs between the seller and buyer. Gain familiarity with these terms to negotiate effectively and ensure a smooth import process with guidance from freight forwarders.
FAQs Related to Differences Between FCA and FOB
In the end, let’s go through some of the frequently asked questions about the Free Carrier and the Free on Board.
Q1: Can FCA and FOB be used interchangeably for any type of goods?
Yes, both FCA and FOB can be used for various types of goods, ranging from raw materials to finished products, as long as the buyer and seller agree upon the terms.
There is a misconception that the FOB cannot be used for containerized cargo, which is not true. In fact, FOB is more popular for containerized cargo, especially when shipping from China-USA/EU shipments.
Q2: Are there any specific documentation requirements for FCA and FOB?
The documentation requirements may vary based on the trade agreement, but generally, both FCA and FOB involve the exchange of necessary shipping documents such as invoices, packing lists, bills of lading, and export/import licenses.
Q3: Who is responsible for selecting the carrier in FCA and FOB?
In Both FCA and FOB, the buyer is the one that selects the freight forwarder and arranges the shipping.
Q4: Are there any additional costs associated with FCA or FOB?
These terms serve as a means to allocate liability and expenses. The party responsible for a specific stage of responsibility should bear the corresponding cost. Overall, the whole cost of the trade remains the same.
Q5: Is insurance mandatory in FCA and FOB?
No, neither the seller nor the buyer is compelled to acquire insurance when utilizing FCA or FOB shipping terms. However, it is highly recommended that importers obtain insurance coverage for the cargo when assuming the associated risks.
While insurance is not an obligatory component of FCA or FOB agreements, it serves as a valuable safeguard against potential losses or damages during transit.
