CIF, C&F and FOB Explained - Vol.406
When it comes to international trading, there are a couple of things you should know. All goods and services, including cars, are subject to different regulations. If you don't have experience with this, it may be a bit confusing to understand at first. For that reason, we decided to show you some of the most important agreements and explain how they work.
What Are International Commerce Terms?
The International Chamber of Commerce (ICC) created a set of different terms, known as Incoterms. CIF, C&F, and FOB are among the Incoterms Rules for Sea and Inland Waterway. Each of these represents a specific agreement between the buyer and the seller, which divides the costs and responsibilities between them.
A Cost, Insurance, and Freight (CIF) agreement states that the seller has a higher responsibility than the buyer in terms of delivery. The seller takes responsibility for shipping arrangements, as well as the transport costs, and delivers the goods to the buyer's destination port of choice. From that point, the buyer assumes the responsibilities, costs, and risks.
This agreement also covers the matter of insurance. The seller covers the minimum marine insurance costs, with the amount being discussed by the buyer and the seller.
Although this sounds compelling, keep in mind that this is one of the more expensive options. Since your cargo is your responsibility from the moment it reaches the port, you may have to pay additional fees, like custom clearance fees and docking fees. You also have no control over the transportation process, since the seller arranges it.
Despite this, CIF is often the most common choice among new importers, since it's a very convenient option. The seller takes care of pretty much everything, so you wouldn't have to deal with complex details.
Cost and Freight (C&F), commonly referred to as CFR or CNF, is very similar to CIF. The only difference is that the seller doesn't cover the insurance. To explain how C&F works, here's an example:
Let's say you're a buyer in Los Angeles and you decided to import goods from China. The seller agrees to carry the goods to a port in China and pays all fees related to loading the goods onto the vessel. The seller chooses the ship himself and cover the freight costs.
When the cargo reaches the LA port, you assume all the costs. You pay the clearance free, as well as the insurance, since in this case it's not the seller's responsibility.
Free on Board, or Freight on Board (FOB) determines from which point the cost and responsibilities are transferred from the seller to the buyer. There are four different types of FOB:
- FOB (port of origin), Freight Collect
- FOB (port of origin), Freight Prepaid
- FOB (port of destination), Freight Collect
- FOB (port of destination), Freight Prepaid
The first part determines the place from which point onward the buyer assumes the risks and responsibilities. The second part determines the freight charges. 'Collect' means that the payments falls under buyer's responsibility, while 'Prepaid' means that the seller makes the payment.
There are two main reasons to consider FOB over CIF or C&F. The first reason is that you have much more control over the freight costs and the freight itself. The second reason is the price. Your freight forwarder can help you find a fair freight rate and give you all the necessary information about the process.
There is one thing to keep in mind when it comes to FOB, and that is the risk of receiving damaged goods. In some cases, if you're a buyer, the goods belong to you the moment they are shipped. If you receive damage goods, the seller is under no legal obligation to take them back, so always make sure to understand the terms of shipment.