Shipping contracts are crucial to your wholesale business’s sales and distribution operations. At some point, imported goods that cross international borders become the buyer’s property instead of the seller’s. But when and where exactly does ownership change? The risks and expenses incurred while the goods are in transit, who is responsible for those?
Among the International Commercial Terms (Incoterms)’ list of the most popular international shipping agreements are CIF and FOB.
The main difference between CIF and FOB is the party that is responsible for the goods while they are in transit. In a CIF agreement, the seller is responsible for the goods while in transit, whereas with a FOB agreement, the buyer is responsible for the goods while in transit. The only significant difference between the two is that.
We’ll discuss the distinction between CIF and FOB in this article. When choosing a shipping agreement for your international shipments, there are a few things to take into account that we’ll compare between these two shipping agreements and cover.
What Is A Shipping Agreement?
In essence, a shipping obligation establishes who, the buyer or seller, is in charge of the order while it is in transit between shipment and delivery.
In instances of cross-border trade, this is particularly important. This is due to the shipments’ frequent passage through international waters and their compliance with various laws and regulations. It helps to keep any potential problems to a minimum to have everything in writing regarding who is accountable for what.
Other terms, like delivery information, pricing, and so forth, may also be included in shipping contracts. Determining the obligation and liability of who is responsible for any potential shipping damages is crucial when dealing with large orders, particularly those that are international.
Make it clear to buyers what kinds of shipping liability obligations your company is prepared and able to support as you negotiate deals with them. For instance, you should let your customer know if you prefer to transfer responsibility before transit when negotiating shipping arrangements.
Fortunately, the Incoterms documentation published by the International Chamber of Commerce specifies standard shipping agreements. To help you understand how these agreements function, let’s examine the two most common shipping agreements, CIF and FOB.
What Is CIF?
When shipping bulky items by sea, including oversized items, CIF is frequently used. Loading the shipment onto the vessel is the seller’s responsibility. The price of shipping and insurance is paid for by the seller. Along with that, the seller acquires any necessary paperwork, licenses, and potential inspections.
As soon as the goods arrive at the port of destination, the buyer under a CIF agreement takes full responsibility for the goods. This implies that any additional costs, like customs duties, may be the responsibility of the buyer, who will be responsible for paying them once the item arrives at the port of destination. Following payment, the transport company gives the buyer the transfer paperwork for the goods.
When buying goods, CIF is viewed as a pricey option. This is so that the seller can choose a transport company of their choosing, which may charge the buyer more money overall. If the buyer only relies on individuals who represent the seller, communication may also be a problem. Before the goods are cleared, the buyer might have to pay extra charges at the port, like docking fees and customs clearance fees.
Pros And Cons Of CIF
For both buyers and sellers, selecting CIF as a shipping agreement has benefits and drawbacks. Consider the benefits and drawbacks of CIF for a moment.
- The seller has more control
- Buyer has less responsibility
- A more seamless experience for the buyer
- Less stressful for buyers
- Can give sellers a leg up over competitors (due to the convenience to buyers)
- More responsibility on the seller
- Buyers have less control over the cost of delivery
- Additional costs for sellers might make the cost of goods higher
- Can be more costly for all parties involved
- Sellers take on more responsibility
When Use CIF?
As a buyer, the main reason to choose CIF would be for convenience. You won’t have to deal with any claims, risks, or concerns during the course of the freight’s transportation because the seller will be responsible for handling them.
This is crucial when you’re acting as an importer because you’re a buyer unfamiliar with the complexities of shipping internationally. When transporting small amounts of cargo, many importers will also use CIF. For these smaller volumes, insurance costs may exceed the CIF fees imposed by sellers.
As a seller, offering CIF shipping has the potential to increase margins, but comes with the risk of continuing to be in charge of the goods while they are in transit.
When Not To Use CIF?
CIF is more expensive for buyers than FOB because sellers must charge them for the cost of shipping and insurance.
As previously stated, vendors can raise the service fees to increase their profit. As a result, the buyer pays more when using the CIF offered by the seller.
Simply put, consumers are willing to pay more for convenience. Additionally, buyers relinquish control over their shipments. Since the buyer doesn’t technically own the goods in a CIF shipment, it will be much more difficult for them to obtain the correct shipping information in the event of an issue.
Additionally, buyers must trust that the seller will supply accurate Importer Security Filing documents (ISF). There are severe penalties and fines for buyers who file this late. Customers are therefore exposed as a result of this reliance.
The topic of insurance is the last one. In the case of CIF, the insurance covering the freight during transit belongs to the sellers. Therefore, in the event of a claim, the seller will receive the payout.
This can lead to significant delays and communication problems as the issues of replacement and compensation are resolved because the buyer has typically made some sort of financial commitment.
What Is FOB?
A shipping arrangement known as “Free on Board,” or simply “FOB,” places the onus of responsibility on the buyer as soon as the shipment leaves the port of origin. The buyer is in charge of selecting and paying for a freight company, as well as for the costs associated with insuring the cargo.
With a FOB shipping agreement, the responsibility transfers from seller to buyer once the products are loaded and “past the ship’s rails” at the point of origin.
The main benefit of FOB is that it can be significantly less expensive than CIF and other shipping contracts. This is possible because buyers can set their own rates. They also have the authority to make compromises if they so choose, such as forgoing certain insurances or safeguards.
The quality of their customers’ experiences may be compromised, so sellers are typically less willing to take those risks.
Pros And Cons Of FOB
Let’s weigh these benefits and drawbacks.
- The buyer has more control
- Buyers can make cost-effective decisions if possible
- Fewer costs for the seller
- Less responsibility for the seller
- Buyer has more responsibilities
- Less seamless for buyers than CIF
- The buyer has more expenses to take on
When To Use FOB?
For buyers, FOB is typically the most cost-effective option in that buyers don’t have to pay a high fee to sellers as they might with Just a brief explanation of CIF.
The key element is the ability to choose their freight forwarder which allows them more control over the freight costs and timing. They hold title and responsibility for the shipment, enabling easier access to information that can be used to solve issues.
Sellers also benefit from FOB in that they don’t have responsibility for the goods. Once the shipment leaves their warehouse, sellers can then enter the sale as “completed” and not have to worry about additional costs or problems.
When Not To Use FOB?
As a new importer, it’s not recommended to use FOB. Keep in mind that buyers are more responsible for the goods while they are in transit.
New buyers risk making costly errors that carry heavy penalties if they lack experience and a thorough understanding of the complexities of international shipments.
Alternatively, a CIF contract may be a better choice until a new buyer gains experience and a better understanding of importation processes.
Differences Between CIF And FOB
Who is responsible for the goods during transit is where the main distinctions between CIF and FOB exist. In a CIF agreement, the seller bears the costs and risks of transportation up until delivery, after which the buyer is in charge. With a FOB agreement, the seller transfers all of the risk and costs to the buyer once the shipment is loaded onto the shipping vessel.2
For both parties, each agreement has specific benefits and disadvantages. While buyers frequently prefer CIF and sellers frequently prefer FOB, some trade agreements find that one method is more practical for both parties. For instance:
- In order to persuade a buyer to accept a deal, a seller who is more knowledgeable about local customs than the buyer would likely assume CIF responsibility.
- The larger party assuming liability may be preferred by smaller businesses because it can save money.
- Additionally, some businesses require a specific shipping agreement because they need special access through customs, need to document freight costs for tax purposes, and for other reasons.
FOB agreements are typically regarded as more affordable and efficient by buyers. They can choose shippers and insurance limits with more freedom, which explains this. Contrarily, CIF contracts might be more expensive. The seller may choose a preferred shipper, who may be more expensive since they have more control. Additionally, because they want to guarantee that the goods are delivered in top condition, they might select higher insurance limits.
What One Is Cheaper, FOB Or CIF?
Compared to a cost, insurance, and freight agreement, a free onboard contract is much less expensive. Because buyers have more control over shipping logistics, such as insurance and transport costs, this is the case. In order to insure their shipments, buyers are free to sign a contract with any shipper of their choosing and select the level of coverage they require.
Which Should You Choose: CIF Or FOB?
Both CIF and FOB offer distinctive advantages. Your unique situation will determine which one you select for your particular trade needs. Since each choice has specific benefits and drawbacks, neither is inherently superior to the other.
When the goods leave the port of origin, a FOB agreement releases you as the seller from responsibility. You will spend less money on this arrangement, but your customer will pay slightly more. A lot of your time is also consumed by the fact that your work will be completed much sooner than if you choose the other option.
Customer service is crucial to developing lasting relationships with customers, though. Although a CIF agreement is more expensive and time-consuming, it greatly streamlines the process for your buyer.
From the buyers’ perspective, CIF is the better option in situations where a “done for you” approach is desired. Of course, choosing a CIF trade agreement also calls for some financial pliability.
Purchases made through CIF are a good option for buyers who are on a stricter budget and desire more control over the process.
It is ultimately up to you to choose which shipping requirement makes the most sense for both you and your customers.
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We typically advise FOB for purchasers and CIF for vendors. FOB helps buyers save money and gives them control, but CIF helps sellers make more money. To help new buyers get used to the import procedure, we advise them to use CIF.