What is the CIF? An international shipping agreement known as cost, insurance, and freight (CIF) details the fees paid by a seller to cover the costs, insurance, and freight of a buyer’s order while the cargo is in transit.
No other modes of shipping are covered by CIF; it only applies to shipments made by sea or waterways. However, this Incoterm may also be used for less than container loads. This shipment method is most frequently used when shipping full containers.
Continue reading to discover more about CIF, including its definition, pertinent obligations, and various examples.
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What Does CIF Mean in Shipping Terms?
When shipping goods internationally, the cost, insurance, and freight (CIF) agreement is used. According to CIF, the seller is in charge of paying for the freight, insurance, and costs associated with the buyer’s shipment while it is in transit. Once the freight has arrived at the buyer’s destination port, all expenses are the buyer’s responsibility.
Under CIF terms, the seller’s responsibilities include:
- Purchasing export licenses for the product
- Providing inspections of products
- Any charges or fees for shipping and loading the goods to the seller’s port
- Packaging costs for exporting the cargo
- Fees for customs clearance, duty, and taxes (for exporting)
- Cost of shipping the freight via sea or waterway from the seller’s port to the buyer’s port of destination
- Cost of insuring the shipment up until the buyer’s port of destination
- Covering the cost of any damage or destruction to the goods
Within the time period agreed upon, the Seller shall deliver the Goods to the Ship and shall provide evidence of such delivery and loading.
The cost of importing and delivering the goods is the buyer’s responsibility once they have reached their final port of destination. Some of these costs include the following:
- Unloading the product at the port terminal
- Transferring the product within the terminal and to the delivery site
- Custom duty charges and associated with importing the goods
- Charges for transporting, unloading, and delivering the goods to the final destination
Advantages And Disadvantages For The Buyer In CIF
There are numerous benefits for the buyer when transacting under a CIF agreement, simplifying the purchasing process. For more seasoned buyers, however, the drawbacks frequently outweigh the advantages.
- In the country of origin, the seller is responsible for covering all transportation and export expenses. The advantage of CIF is that it enables the seller to handle the majority of the shipping that takes place outside of the destination country, which is useful when the buyer has little familiarity with the origin country and lacks the contacts to help with local transportation and exportation.
As it poses little risk to the buyer, this may seem advantageous to many.
- The seller is obligated by CIF to make sure that their goods can be properly exported even if the buyer is unsure of the export requirements for the product. When shipping hazardous or dangerous goods or making purchases in nations where the rules and regulations are not properly documented, this can be useful.
- The seller’s insurance can help offset some of the losses in the event of a maritime problem, such as piracy, weather-related damage, or Named Perlis.
- CIF enables a buyer to make use of their existing resources without having to look for new ones in the country of origin when they have an established partnership with a third-party logistics provider that can handle domestic and international shipments.
- Once the goods are on board the carriage vessel, all risk is assumed. The buyer, not the seller, is in charge of fixing or covering losses when something goes wrong during the shipping process.
- The buyers are responsible for paying any and all import taxes and duties. The price of insurance and transportation is built into the sale price because the seller is required to obtain insurance. When importing under the CIF Incoterms, the buyer is responsible for covering the costs of freight and insurance in addition to the customs duties and taxes that are levied on the product’s price.
- If the buyer does not fully comprehend the terms of this agreement, that may be CIF’s biggest drawback. Suppliers have been known to define CIF as “free shipping”. To the unfamiliar international buyer, this assumption is that the cargo will be delivered to their door when in reality, it is “free shipping to the destination port”. We’ve heard horror stories from buyers who claim that the supplier left their cargo stranded at the port, incurring unanticipatedly high costs on their end.
When To Use CIF?
Air freight is not included; only product transportation by river or sea qualifies for CIF. Customers who don’t want to pay for insurance or freight, or accept responsibility for international delivery should consider CIF as a viable option. When this occurs, CIF is used.
Transfer Of Risk In CIF
It’s important to keep in mind that depending on the type of shipping agreement, different risk and cost transfer points between the buyer and seller may apply when shipping internationally. The risk transfer occurs at a different stage than the cost transfer in CIF. The precise terms of the contract will determine when ownership of the goods passes from seller to buyer.
Since the seller covers the costs of shipping, freight, and insurance up until the time the cargo gets to the buyer’s port of destination, the cost transfer happens once the products get there. The risk does, however, shift from the seller to the buyer once the goods have been loaded onto the ship. The buyer owns the goods once they are loaded onto the ship, despite the fact that the seller is required to buy insurance; if the goods are damaged during transit, the buyer must make a claim with the seller’s insurance provider.
There are some circumstances where a CIF agreement may not be appropriate because the buyer only assumes risk after the cargo has been loaded onto the vessel. For instance, when shipping containerized cargo, the merchandise may remain in the container for several days before being loaded onto the ship at the seller’s port. The buyer would be at risk under CIF because the goods would not be covered by insurance while they were in the container awaiting loading onto the ship. CIF agreements would therefore not be suitable for shipments, including containerized cargo.
Example Of CIF
Let’s use Best Buy as an example. Best Buy placed an order with Sony for 1,000 flat-screen TVs using a CIF agreement to the port of Kobe in Japan. The order was delivered by Sony to the port, where it was loaded onto the ship for transportation. After loading is complete, Best Buy assumes all loss liability instead of Sony. In exchange, Sony has paid for insurance and freight costs up until the ordered items arrive at the buyer’s port of destination.
A fire starts in one of the cargo bays while the ship is sailing. During firefighting efforts, the water and fire both cause damage to the cargo. Because a CIF agreement was in place, Best Buy is able to submit an insurance claim to get the money it needs to replace the damaged goods.
Differences Between CIF And FOB
- The seller’s responsibility during the goods’ transportation is what distinguishes CIF and FOB.
- In a CIF transaction, the seller bears the bulk of the shipping-related obligations and costs, including freight and insurance.
- The seller is released from obligation when the items are placed into the ship or “crossed the ship’s line.” The buyer assumes full responsibility for the outcome of that course.
- Since the client can negotiate a lower freight and insurance price with a logistics company of their choice for the latter, CIF agreements are more expensive than FOB agreements.
Read More: CIF Vs. FOB
Who Pays CIF Freight?
Till the goods are delivered to the buyer’s port, the seller is responsible for covering the costs of freight transfer, shipping, and insurance.
Does CIF Include Duty?
The seller is liable for any duties incurred when the goods are exported from the seller’s port of destination. Import duties, however, are paid by the buyer and are assessed at the buyer’s port of destination.
Difference between CIF and CIP
The amount of insurance that the seller is required to obtain determines how CIF and CIP differ from one another. Cost, Insurance, and Freight (CIF) refer to all costs up to the port’s destination. CIP stands for carriage and insurance paid to the specified destination. The seller must provide cargo insurance for the ship’s carriage for CIF. They are required to ensure the entire transportation for CIP.
In international shipping, the phrase “cost, insurance, and freight” (CIF) refers to the seller’s obligation to cover the costs of shipping, freight expenses, and cargo insurance when the shipment is made by water or land.
CIF denotes that the seller will bear the expense of shipping the cargo and securing insurance to cover the buyer against any losses incurred due to transportation-related damage. Once the cargo reaches the buyer’s port, the buyer, however, is responsible for the goods.
Read More: What is TT Payment?