Overseas supplier arranging freight under CFR or CIF terms
When it comes to international trade and shipping, selecting the appropriate Incoterms (International Commercial Terms) can greatly impact your business’s success. For small to medium-sized businesses, making the right choice is crucial. We’ll explore the differences between EXW, FOB, CIF, and CFR terms and provide recommendations for startups and buyers.
Choosing the Right Shipping Terms: EXW, FOB, CIF, or CFR
For many businesses involved in international trade, Incoterms play a crucial role in defining the responsibilities and liabilities between buyers and sellers. Among these Incoterms, CFR (Cost and Freight) and CIF (Cost, Insurance, and Freight) are common options. While they can simplify certain aspects of global trade, there are notable disadvantages associated with arranging shipments under CFR or CIF terms. Understanding these downsides can help businesses to choose the most suitable Incoterms for their particular trading scenarios.
Demystifying The Most Common Incoterms: EXW, FOB, CFR, and CIF Explained
- EXW (Ex Works):
EXW is the most seller-friendly Incoterm. Under EXW, the seller’s responsibility ends once the goods are made available for pickup at their premises. All other expenses, risks, and responsibilities fall on the buyer.
3. CIF (Cost, Insurance, and Freight):
CIF terms go a step further by including insurance and freight costs. The seller takes responsibility for delivering the goods to the destination port, covering the freight and providing insurance until arrival. However, the risk shifts to the buyer once the goods are offloaded
- FOB (Free On Board):
FOB terms are more balanced, with the seller responsible for delivering the goods to the port of shipment and loading them onto the vessel. Once the goods are on board, the risk shifts to the buyer. FOB is a good option if you want more control over the shipping process but still want some assistance from the seller
4. CFR (Cost and Freight):
Similar to CIF, CFR terms involve the seller covering the cost of freight to the destination port. However, in this case, the buyer is responsible for obtaining insurance. Like CIF, the risk transfers to the buyer once the goods are offloaded
Unexpected Expenses: A Lesson in Clarity for International Shipments
Common Scenario in International Trade:
Mr. Smith’s supplier in China offers to handle the freight forwarding and shipping costs for goods to be delivered to Australia. The supplier assures Mr. Smith that he only needs to cover customs clearance, local fees, and government charges upon the goods’ arrival in Australia.
Taking the supplier’s advice, Mr. Smith contacts a local freight forwarder and customs brokerage in Australia to obtain a quote for customs clearance and final delivery.
The brokerage promptly sends a quote for customs clearance and delivery services. However, it’s important to note that the quote does not include duties, taxes, and local port charges. Unfortunately, this crucial detail often goes unnoticed by clients, leading to potential issues down the line.
When the shipment arrives in Australia, customs clearance is initiated, and the final invoice is generated. At this stage, Mr. Smith reviews the invoice and is surprised to find that the costs are considerably higher than expected, causing concern and the need for further clarification.
- Risk Transfer Point:
Both CFR and CIF terms imply that the risk passes from seller to buyer once the goods have been loaded on the vessel at the port of shipment. This means that if any damage, loss, or delay occurs during the main carriage, the buyer has to bear these risks. Despite the seller being responsible for arranging transportation, the risk is transferred to the buyer early, which can result in potential disputes and confusion.
- Limited Legal Recourse:
In the event of a dispute or an issue with the carrier, the buyer might face difficulties in legal recourse because the contract of carriage is between the seller and the carrier, not the buyer. This can make it difficult for the buyer to claim compensation in the event of loss or damage to the goods during transportation.
- Potential Delays:
Since the seller has the responsibility of arranging transportation, any delays in booking or scheduling the shipment fall on their shoulders. If a seller is not efficient, these delays can impact the buyer’s supply chain and subsequent business operations.
Essential Considerations for CIF and CFR Incoterms
- Limited Control for Buyers:
When goods are shipped under CFR or CIF terms, the seller is responsible for arranging and paying for the transportation of goods up to the destination port. As a result, the buyer has limited control over the choice of carrier, shipment routes, or even the cost of freight. This lack of control can cause issues if the goods aren’t transported in the manner that the buyer would have preferred.
- Insurance Coverage Limitations:
Under CIF terms, the seller is required to procure marine insurance for the goods. However, the coverage is typically at the minimum level. If the buyer requires a more comprehensive level of insurance, they will have to arrange and pay for it themselves, thus leading to additional costs and efforts.
- Hidden Costs:
With CFR and CIF terms, buyers may face unexpected costs. These might include charges at the destination port such as unloading, storage, or customs duties. These costs are not covered by the seller under CFR or CIF terms, which might lead to increased total cost for the buyer.
Recommendations for Startups and Buyers
Opting for EXW or FOB terms provides greater control over the shipment and allows you to manage costs more effectively. These terms strike a balance between seller support and buyer control, making them ideal starting points.
Exercise Caution with CIF or CFR: Be mindful of the potential loss of control over local costs. It’s essential to have a thorough understanding of these expenses before selecting these terms.
In conclusion, the choice of Incoterms significantly impacts your importation process. To make the right decision, carefully evaluate your business’s size and level of experience. Startups are often best served by EXW or FOB terms, which provide control and support. Always consult with your freight forwarder for tailored guidance based on your specific needs.