The Ultimate Guide to CIF vs. FOB: Understanding the Key Differences
When it comes to shipping, there are two main terms that business owners need to understand: CIF and FOB. Both of these acronyms stand for different things, and it’s important to know the difference between them so you can make the best decision for your business. In this blog post, we will break down the key differences between CIF and FOB shipping, so you can choose the option that is right for you!
Where exactly is ownership handed over? Who is liable for risk and costs while the goods are in transit? International shipping agreements between buyer and seller help answer these questions in a legally binding way. The International Commerce Terms (Incoterms) of CIF and FOB determine who assumes responsibility and liability for the goods at a given point along the transport line.
shipping agreements play a huge role in your sales and distribution process. This determines who is responsible for goods while they are in transit between the seller and buyer. There are many different options for shipping agreements in importing and exporting. That is where Cost, Insurance, and Freight (CIF) and Free on Board (FOB) come into play.
What are Incoterms?
Incoterm is international commerce terminology published by International Commerce Organization (ICBC). It is intended to facilitate international commerce with clearly defined buyer & seller roles in the world market. Since 1936, the company name represents more than 45m businesses worldwide in 100 countries. The incoterm was in usage until 2022 3.0.
Overview of International Commerce Terms
FOB / CIF is a form of international commerce termed often shortened as Incoterm. Incoterm is a model of trade agreements that was developed and regulated through the International Chamber of Commerce. Although incorterms are not legally binding or contractable in its own accord it provides the necessary framework for a set of terms and agreements easily included in trade contracts. In 2020, ICC will define 11 different Incoterms within the Incoterms 2020 rules.
What is a CIF contract?
CIF is commonly the main ownership in an individual’s property from its purchase date to delivery of an item by the customer or a third party in the same business. CIF Responsibilities and Transfer of Risk With CIF, the seller assumes responsibility for the goods from their facilities to the port of destination. CIF contracts require sellers to bear any losses and expenses as long as the goods reach their final destination. The ownership and liability of the product pass through the rails of the vessel at the destination point. The seller, therefore, bears all responsibility for the shipping. They should provide the required documentation for both countries, pay the insurance costs and be responsible for safe shipment. It is important to note that, with CIF, seller pays further shipping costs that are associated with delivering the items from the port of destination to the buyer’s warehouse.
CIF is Cost Insurance and Freight, which is considered as one of the most expensive options while getting products shipped from one destination to another as the seller of the product uses a freight forwarder of their choice who may or may not charge the consumer or the buyer more than the actual price. This is to add up a certain amount of margin or profit while getting the work done.The shipper transfers the freight and freight charges to the invoice sent to the buyer.
With CIF, responsibility transfers to the buyer when the goods reach the point of destination
Why do people use CIF?
You may be a seller using CIF contracts for better value. There is no risk, claim or freight issue when transferring. This can be particularly helpful to those unfamiliar with international shipping procedures. Many exporters use CIF contracts when they ship small batch cargo as insurance for smaller volumes can actually be more expensive. Sellers are more likely to ship CIFs as this generates more margins. The possession of the goods in transit is, however, a significant risk to the buyer’s goods.
Who owns the goods in CIF?
CIF translates to the seller being responsible for transporting the shipment and securing insurance against damages to the goods whilst transported by the customer. However, once the shipment arrives the buyer must carry the goods and the shipping company will pay back the freight to the purchaser.
Pros and cons of CIF
The choice of CIF for the transport of goods is good for buyers but it has fewer risks. Purchasing and selling are the main consideration. Let’s examine CIF’s advantages.
Free on board (FOB)
What is FOB? Free on Board (FOB), abbreviated as FOB, is a shipping agreement that the buyer assumes responsibility for from the moment the goods leave the original port.
Cost insurance, freight and free on board (FOB) is an international shipping arrangement for the transport between buyer and seller. They are among the most common of the 11 global trading terms (Coterms) which were created by the International Chamber of Commerce (ICC) in 1936.12 The specific definitions differ a bit in all the countries but each agreement generally specifies a destination and origin number which is used when dealing with A third document explains buyer responsibilities and the buyer’s responsibility.
Freight Collect means that the buyer is responsible for the freight charges; this is more often the case. Freight Prepaid means the seller has paid for the charges. Most often, FOB refers to FOB Origin, and Freight Collect. This means that the buyer assumes ownership and responsibility for the goods once they leave their originating point.
A FOB contract allows the suppliers the obligation of storing the goods at the ship. It means the company pays the shipment of the cargo into the harbour and then onto the ships. As such, sellers are responsible for this contract. The merchandise shall enter the hands of the purchaser when loaded on board ship. The buyer will then assume total and exclusive responsibility for transportation, insurance, and extra costs. Buyers also have an obligation to unload goods from ship.1. Ship-ship contracts in these types are more flexible than CIF.
Why do people use FOB?
FOB prices are generally the most attractive to consumers. In other words, the seller does not pay as much as he would in CIF. In addition, buyers can determine the time of shipment and the freight costs. When something happens to the goods they own their own rights, and they have more control to get information and resolve their concerns. A buyer also enjoys the FOB as there’s no obligation. After the goods leave their stores, sellers will be able to mark their sales complete.
Why not use FOB?
New importing customers can use FOB only to minimize risk of the goods during shipment. New buyers whose understanding of international shipment can lead to costly errors that can cause hefty fines. Rather, new buyers may opt for CIF contracts before they know how importation is done.
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The key differences between CIF and FOB
International trade,The crucial difference between a FOB and a CIF agreement is the point at which responsibility and liability transfer from the seller to the buyer. . In a CIF contract, sellers are liable to carry the goods in transit and the seller is also liable for carrying the products in transit pursuant to a FOB agreement. There are no major differences between them. FOB can often prove cheaper and more efficient to implement. It’ll help buyers make more cost-efficient buying decisions with regard to shipping.
What is a shipping agreement?
Basically, shipment obligations determine who is responsible for orders while they are in transit. These are particularly important in crossborder commerce. These shipping routes often go through international waters and are governed by other laws and regulations. A clear record of who has responsibility for what helps reduce possible issues. Shipping contracts also include terms including deliveries, prices etc.
CIF or FOB ?
As you negotiate deals with buyers, you need to make it clear what sort of shipping liability obligations your business is willing and able to support. For example, if you prefer to hand off responsibility before transit, that needs to be made known while you’re negotiating shipping agreements with your customer.
In most cases, we recommend FOB for buyers and CIF for sellers. FOB saves buyers money and provides control, but CIF helps sellers have a higher profit. However, we recommend that new buyers use CIF .
