Broken or lost cargoes, pending invoices,… which both parties declined to accept responsibilities. When you don’t place a shipping term for your contract, that happens. So, a fit shipping term is always a solution.
Having a wealth of knowledge in this industry, we can provide you with the most helpful expertise about international trade terms in general.
This article will analyze two popular international commercial terms: FOB and CIF. Which one is better?
What is a shipping term?
A shipping Agreement (also known as Shipping terms) is created when a shipping agent transports a company’s goods. This agreement will clearly define a legal relationship between clients and their shipper, helps both parties set an appropriate goal, and limit disputes.
The shipping term should include the responsibility and obligations of both parties:
- Who books the shipping agent?
- Who will pay for the shipping process?
- The seller assumes responsibility, and the buyer assumes responsibility.
- Other terms: delivery, pricing (freight charges, additional fees …）
Be clear about what international trade term your company is willing and able to support.
Based on the International Chamber of Commerce’s General Rules ( INCOTERMs).
The two most common transport agreements are FOB and CIF. Keep scrolling down to understand how they work.
What is FOB？
Free on Board (or FOB) is an international shipping agreement that puts the buyer’s obligation right when the seller loads onto the freight vessel (risk transfer point). At that time, FOBs also liability transfer from a seller to a buyer (cost transfer point).
Under the FOB contract, the seller pays for freight costs, insuring the cargo, purchases insurance, and other additional costs.
Suggested reading: FOB incoterms
What is CIF?
“Cost, Insurance, and Freight (or CIF)” has the same risk transfer point with FOB: onboard. However, the responsibility transfers from a seller to a buyer once the shipment arrives at the final destination port (cost transfer point).
Under the CIF contract, the buyer’s responsibilities are choosing and paying for shipping, insurance, and other further shipping costs.
Suggested reading: CIF incoterms
FOB vs CIF: what’s the difference?
FOB & CIF are two popular terms used the most in international shipping. These two have the same risk transfer point (port of loading). Buyers and sellers have responsibilities for declaring custom docs and performing shipping procedures at their dock.
The major difference between FOB and CIF lies in the responsible party of the goods in transit. If the seller is responsible for the goods in transit in the CIF agreement, for the FOB term, the buyer is.
Pros and cons of FOB and CIF
Pros: Buyers generally consider FOB the most affordable or cost-effective option. On FOB, the buyer might get fewer costs, minimum insurance money, and more control over freight shipping planning,… That’s because they’re the ones to choose shippers and insurance limits.
Cons: If you’re a new buyer, FOB agreements might not be the option best suited for you. Since this term places many responsibilities on shippers, you need to specialize in selling goods internationally. Otherwise, many penalties, delays or other problems can occur.
Pros: Sellers can charge more than the amount and get better secure cargo insurance. Also, the buyer doesn’t have to declare the shipment value to the insurer.
Cons: CIF contracts can be costly. Since the seller’s desire to ensure shipment is always in excellent condition, they may choose a preferred shipper who may be more expensive, higher insurance limits. Also, some countries don’t allow CIF imports.
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FOB vs CIF: Which is best for your business?
Both CIF and FOB shipping terms have unique benefits. It would help if you choose a shipping term depending on your company-specific circumstances.
- The buyer has a tighter budget.
- Buyers had a long experience in this industry.
- They want to comprehend the cargo status.
FOB is the best choice. Why FOB?
FOB is the most used term. From the buyer’s perspective, any shipping arrangement they have the power to control is a preferable one. FOB agreement gives them more control over the shipping contracts and the overall cost of the goods than CIF does.
Sellers also feel “weightless” since they don’t have to worry about the goods after loading them on the ship. Once those leave their warehouse, sellers can mark the export trade as “complete.” It’s hassle-free shipping for the seller.
If you are new to this industry, I recommend trying CIF. Why CIF?
Observing the buyers’ view, CIF is the better option in situations where a “done for you” approach is desired. Of course, opting for a CIF trade agreement also requires a bit of flexibility with the budget. Since the transportation is beyond the customer’s control, it can be challenging to obtain information about the status of the cargo. With CIF, It is much more seamless for the buyer.
CIF may generate higher margins if the seller knows how to make the most of this term. Most sellers prefer this term due to this reason.
In most situations, we’ll go for FOB as buyers and CIF for sellers. Buyers can save a lot with FOB, while CIF helps sellers obtain higher revenue. Make your decision wisely!
FAQs about FOB vs CIF
1. How many fees does a buyer need to pay for a FOB export?
Transportation up to Customs + Customs clearance + unloading charges + Loading Charges + Freight charges +(Local Insurance) = FOB
2. How many fees does a seller need to pay for CIF?
Transportation up to Customs + Customs clearance + unloading charges + Loading Charges + transportation costs + Insurance = CIF
3. What are the documents required under CIF and FOB
The shipping documents in CIF and FOB contracts are three unless otherwise agreed by the parties involved sellers and buyers. Other document scans are attached with the Clean Bill of Lading, Marine Insurance Policy, and Invoice.
4. Does CIF Include the delivered duty paid?
In any term, duty charges are the responsibility of each party. The export duty fee belongs to sellers, and buyers have to pay their import duty fee.
5. What are FOB origin and FOB destination?
FOB origin (or FOB shipping point) indicates the sale right after the seller ships it. FOB destination defines the deal when the buyer receives the item.
The international commerce terms CIF and FOB shipping agreements play a considerable role in the contract. Those two have unique benefits for each party. And got some drawbacks also! Decide which shipping obligation makes the most sense for both parties. It’s up to you. Calculate and consider thoroughly. Find your best-suited shipping term before signing the contract.
Are you looking for a shipping term that benefits your business? We can consult the perfect shipping arrangement you are looking for within seconds, so contact us.
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