When businesses enter into sales agreement, you’ll find terms like F.O.B. factory and freight collect included in the sales agreement. These are referred to as terms of sale.

Whether your company is the buyer or the seller, it’s important you understand these terms of sale because they determine:

• when title to the goods passes and thus, who assumes the risk of loss, damage, or delay while the goods are in transit;
• which party—the buyer or the seller—has the right to specify which carrier will perform the transportation service;
• and who pays the transportation charges.

While a term such as F.O.B. factory freight collect is usually uttered in the same breath, it involves two separate sales transactions. The fact is the term F.O.B., under common law, means “free on board.” That means the seller absorbs all of the expenses involved in loading the goods aboard the transportation conveyance, such as a trailer, container, or railroad car.

When that’s completed at the factory, warehouse, or some other specified location and the carrier signs the bill of lading, if terms are F.O.B. factory or F.O.B. warehouse then title to the goods passes from the seller to the buyer. From that point on, the buyer assumes all the inherent risks and burdens of transportation, including loss, damage, or delay.

It’s normally the seller that sets the F.O.B. terms. Most sellers prefer to set the terms of sale as F.O.B. factory or warehouse because once the carrier signs the bill of lading they’re off the hook, so to speak. One exception might be when transit damage occurs and an investigation finds that the packaging of the goods was inadequate or improper.

Of course, there are other types of terms of sale. Some industries commonly use F.O.B. destination terms. These terms mean that the seller retains title to the goods until the goods are delivered to the buyer.

The lumber industry often uses those terms if a carload of lumber is shipped east from the West Coast and the seller does not have a buyer at the time of shipment, but later finds a buyer while the shipment is en route.

If your company is is the buyer of goods and the terms of sale are F.O.B. factory, you have the right to specify which carrier will perform the transportation.

The second aspect of terms of sale is who pays the freight. If the freight is to be prepaid, it’s the seller who pays the freight charges; but if the terms are freight collect, it’s the buyer who pays those charges. You might also see terms of freight prepaid by a third party.

Don’t overlook the fact that terms of sale are negotiable, although many sellers are unwilling to make any concession in their terms. One area where a seller may be agreeable to making a change is in its terms to “freight prepaid and add.” This saves the buyer the expense of paying both the seller’s invoice and the carrier’s freight bill. The buyer ends up paying one bill, which not only includes the price of the goods, but the freight charges as well.