When it comes to the logistics of FOB vs CIF, which is best for your business? Let’s find out.
International shipping contracts like cost, insurance and freight (CIF) and free on board (FOB) are used to transport goods between buyers and sellers.
The distinction between CIF and FOB will be covered 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.
Table of Contents
What is FOB Shipping?
FOB refers to “freight on board” or “free on board“. FOB terms come in two parts: Collect or Prepaid, and Origin or Destination.
Free On Board (FOB) refers to the seller’s export clearance of the goods and delivery of those goods while they are on board the ship at the designated port of shipment. All costs and risks associated with the goods go to the buyer as of this point.
It is uncommon to use this Incoterm; United States companies that choose it often misuse the term because they confuse it with the domestic term FOB.
This phrase is also only applicable when the goods can be delivered directly to the location where they can be loaded onto the vessel. The term “Free Carrier” or “FCA” would be more appropriate if they were delivered to a carrier at a container terminal, which is how they are typically delivered to carriers.
Why 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 being the ability to choose their freight forwarder which allows them more control over the freight costs and timing. If anything were to happen to the shipment, they hold title and responsibility allowing better access to information that solve problems.
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 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 must assume more responsibility for the goods while they are in transit.
New buyers run the risk of incurring costly errors and harsh penalties due to lack of knowledge and experience with the complexities of international shipments.
Alternatively, a CIF contract may be a better choice until a new buyer gains experience and better understands importation processes.
What is CIF Shipping?
CIF, known as “cost insurance and freight“, is used by sellers to maintain primary ownership until delivery at the destination port.
It means the seller is responsible for loading the properly packaged goods on board the vessel they’ve nominated or “procure goods so delivered.” The seller also bears the cost of freight and insurance to the named port of destination and is required to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses.
Only in situations where a direct delivery to the location where the goods will be loaded onto the vessel is possible is this phrase appropriate. The term Carriage and Insurance Paid To, or CIP, would be more appropriate if they were typically delivered to a carrier at a container terminal.
Why 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 worries while the freight is traveling because the seller will be responsible for handling them.
As a buyer unfamiliar with the intricacies of shipping overseas, this is especially important for when acting as an importer. When shipping small batches of cargo, many importers will also use CIF. The cost of insurance for these smaller volumes may exceed the CIF fees imposed by sellers.
As a seller, offering CIF shipping can result in higher margins but comes with the risk of continuing to be in charge of and be responsible for 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 mentioned, sellers can raise the service fees to increase their profit. As a result, the buyer pays more when using CIF that the seller offers.
In other words, buyers are paying more for convenience. In addition, customers 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 rely on the seller to deliver accurate Importer Security Filing documents (ISF). Buyers who file this late will face harsh fines and penalties. As a result, buyers are exposed as a result of this reliance.
The issue of insurance comes last. The insurance covering the freight while it is in transit belongs to the sellers under CIF. As a result, in the event of a claim, the seller will be compensated.
This can cause significant delays and communication problems while the issues of replacement and compensation are resolved because the buyer has typically made some sort of financial commitment.
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
Each contract has specific benefits and disadvantages for both parties. Although buyers frequently prefer CIF and sellers frequently prefer FOB, certain trade agreements find that one method is more convenient for both parties. For instance:
- A seller who has knowledge of regional customs that the buyer does not would probably assume CIF responsibility to persuade the buyer to accept a deal.
- The larger party assuming liability may be preferred by smaller businesses because it can save money.
- Additionally, some businesses require a specific shipping agreement due to needs like special access through customs, the need to document freight costs when determining taxation, and other factors.
Buyers typically view FOB agreements as more affordable and efficient. They can choose shippers and insurance limits with more freedom, which explains this. Contrarily, CIF agreements might cost more. Since the seller has more control, they may opt for a preferred shipper who may be more costly. Additionally, because they want to guarantee that the goods are delivered in top condition, they might select higher insurance limits.
FOB Vs. CIF: Which Should You Use?
It depends; while buyers and less experienced exporters might favor an F-group term, more seasoned exporters typically prefer C-group terms. C-group terms like CIF let exporters deal directly with carriers; documentation, bills of lading and all the information needed for letters of credit originate from a single place. Additionally, using C-group terms gives exporters more negotiation power, especially if they book a lot of freight.
However, CIF is best utilized in circumstances where sellers have direct access to the vessel for loading, i.e., bulk cargo or non-containerized goods. Carriage Paid To (CPT) could be a more advantageous option for the majority of exports.
Conclusion on FOB Vs CIF
In a nutshell, the major difference between FOB and CIF is in transference of liability and ownership.
When a shipment leaves its point of origin, title, possession, and liability typically change to FOB.
Once the goods arrive at their destination, with CIF, ownership passes to the buyer.
Simply put, it’s advised that sellers use CIF and buyers use FOB in most cases.
Although CIF enables sellers to keep a higher profit, FOB gives buyers more control and lower costs. The qualification being that inexperienced buyers would be better served to use CIF until they become familiar with the import procedure.
FAQs About FOB Vs CIF
Is FOB Price Higher Than CIF?
Buyers generally consider FOB agreements to be cheaper and more cost-effective. That’s because they have more control over choosing shippers and insurance limits. Contrarily, CIF contracts might be more expensive.
Is FOB Only for Maritime?
When shipping cargo by sea, the most typical agreement between a global buyer and seller is FOB. This Incoterm only applies to sea and inland waterway shipments.
Does CIF Include Import Duty?
CIF includes duty and charges, where the seller assumes responsibility for export customs proceedings and the buyer for import customs.