In case you are importing and exporting, it is worth to know the shipping terms. Free on Board (FOB) and Cost, Insurance and Freight (CIF) are two of the most common shipping terms used in global transactions. Incoterms are these Incoterms specify the obligations of both buyer and seller in a shipping agreement that greatly affects costs, responsibilities, and risk management. The purpose of the below article is to discuss what two FOB shipping terms are and how they differ in terms of key elements in order to help businesses and importers decide which one cif shipping terms is right for them.
Shipping Costs: How FOB and CIF Impact Expenses
FOB and Cost Distribution
In regards to FOB terms, the seller has to deliver the goods on board the vessel at the port of shipment and bear all risks and costs in bringing the goods to the place of shipment. However, after the goods were placed on the shipping vessel, the seller is responsible for all costs thereafter like freight, cargo insurance, unloading and import duties etc.
This is good because the arrangement allows buyers to have more control on shipping cost. They therefore have the power to negotiate better freight rates and select their preferred carriers. If FOB terms are chosen, businesses can deal directly with shipping businesses and improve logistics as well as handle expenses. For instance, a business that deals in bulk goods goods may be able to have a freight forwarder locking in volume discounts with a preferred carrier under FOB terms, which won’t be possible under CIF terms.
CIF and Cost Distribution
From this, CIF terms place a greater financial burden on the buyer pays than on the buyer with FOB terms. The transport, insurance and freight charges up to the destination port are charged by the seller. In short, this means that the buyer does not have to worry about making these costs until the goods reach their end.
CIF, however, is advantageous for buyers but can also lead to higher overall freight costs as well. On the other hand, the total shipping price provided by sellers usually has additional fees, thus taking away buyers’ chances to get more competitive freight rates.
Buyer Assumes Responsibility: Key Differences in FOB vs. CIF
Risk Transfer in FOB
For the purpose of transferring risk at FOB terms, the seller assumes responsibility once goods are loaded onto the shipping vessel the risk shall move from the seller’s warehouse to buyer. If any damage or loss occur in transit the buyer has to file for insurance claims and pay for the loss.
Risk Transfer in CIF
Under CIF, the seller or the buyer will have ownership of the risk of transporting goods until the destination port. The insurance is arranged by the seller who is supposed to protect the buyer in the event of loss or damage. But insurance coverage that is the type and extent of coverage differ and buyers have little choice but to accept chosen policy terms.
CIF can provide peace of mind to the buyer when he has no idea about international shipping agreements, or logistics, but it usually leads to complications if insurance claim arises. Dealing with foreign insurers, especially in respect of the claim settlement aspects may pose difficulties to the buyers. Additionally, the insurance happens to usually be bundled with the basic package of coverage, and it may not completely pay out on the purchase if there is a big loss or damage. In some such cases, the buyer may have to assist the seller’s responsibility insurance coverage with extra policies to protect precisely.
Shipping Vessel: Ownership and Control Under FOB and CIF
Control Over Shipping in FOB
The shipping process is another root of FOB’s advantages, including the control of the buyer. Because everything is arranged by the buyer after loading the goods, a number of carriers and shipping methods can be used (via all kinds of airlines and sea carriers) and with respective transit times. The flexibility enables businesses to manage transportation costs optimally and manage supply chain efficiency.
Furthermore, buyers under FOB agreements are able to keep a closer eye on their shipments as well as negotiate directly with logistics providers to achieve delivery on time. This is especially true if your clients need time sensitive shipments or there is a particular requirement when it comes to shipping.
Control Over Shipping in CIF
According to CIF terms, the buyer assumes ownership whole process of shipping which includes booking vessel, insurance, and freight is done by the seller. This helps the buyer to free from logistics coordination but at the same time the buyer doesn’t have authority to control how the goods are shipped.
If the seller chooses a cost effective, but unreliable carrier, this may be problematic as there is no control over him. For instance, in case a seller opts for a less costly shipping carrier that does not match the buyer’s delivery requirements or if the abovementioned provider does not fulfill its agreed delivery schedule, the buyer will be compelled to accept delays or quality issues at the delivery point or port.
Cost, Insurance, and Freight (CIF): What Buyers Need to Know
The Insurance Factor
An important characteristic of CIF is the fact the seller assumes that insurance is part of the shipping cost. Nevertheless, a buyer should note that coverage, under CIF, is not always complete. Usually, sellers avoid bulk of coverage to reduce the cost which may not be sufficient for the buyer in the event of loss or damage of product.
In cases where the company is shipping high value or fragile goods, it is important to confirm the amount of the purchase insurance coverage and the policy terms. Buyers should think of requesting for additional coverage or talking to the seller to come to a better terms that will ensure the coverage to cater for the new project. In numerous cases, the purchaser will find it increasingly reasonable to buy their very own coverage free from the merchant.
Hidden Costs and Markups
CIF seems to ease the transaction cost by bundling pay for all the expenses, but buyers get charged a premium for convenience. The addition of the freight collect to the total shipping cost will make shipping overseas the CIF more expensive than the FOB where the freight and insurance are being arranged separately.
Moreover, buyers under CIF agreements could later find out they incur additional destination charges, for, say, unloading or port handling, etc. Therefore, it is necessary to clarify these potential expenses before deciding on the CIF contract not to face any hidden charges. In case of freight prepaid, for instance, the seller may keep hidden some administrative fees other costs that are applicable at the destination port which are to be borne by the buyer unexpectedly.
When to Choose CIF
CIF is perfect for businesses that won’t involve themselves with logistics as much as possible that require you undergo a very simply shipping agreement. It is good for small enterprise, new importers, or buyers who do not know the way of doing freight arrangements. But it might not be the right choice for cost sensitive business that has to cut cost.
CIF is a suitable option for companies that have uncomplicated shipping requirements and cannot manage their own logistics and transport costs or for companies dealing with bulk commodities. For these reasons, FOB might be preferred by those with specific shipping needs or cost control measures.
Conclusion
Even in case of FOB and CIF, each of them have their advantages and disadvantages, and businesses need to select the Incoterm that fits them best. Buyers wanting greater control, cost savings and flexibility may choose to handle the shipping, whereas FOB offers less of those but requires buyers to handle it. However, CIF offers a simpler experience for the buyer by taking on more responsibility, but at the same time, involved higher costs and lesser control over the shipping process.
FOB is usually best for businesses that are trying to keep expenses from shipping under control and optimize their sales contract and shipping costs. However, if convenience and ease of transaction is a preference, then CIF is your preferred choice; and contrary to popular belief, you don’t need to be travelling to receive the money.
FOB and CIF are two international commercial terms that differ in the costs covered by the seller and the obligation of the seller pays the buyer, so by knowing the explanations about the three differences between FOB and CIF offered, sellers and buyers can decide as to which international commercial term fits their business goals to avoid problems and secure smooth international trade transactions.
