FOB and CIF- Incoterms Explained

incoterms CIF and FOB

FOB stands for “free on board” and CIF stands for “cost, insurance, and freight”. These international shipping terms determine who assumes the responsibility and liability for the goods at a given point while the goods are in transit. FOB and CIF are among the most common of the 12 international commerce terms (incoterms) established by the International Chamber of Commerce (ICC) in 1936. CIF is considered a more costly option when buying goods whereas FOB shipping relieves the seller of responsibility once the goods are shipped.

Meaning of FOB?

FOB means “Free on Board” or “Freight on board”. FOB shipment relieves the seller of responsibility once the goods are shipped from the seller. After the goods have been loaded—technically, “passed the ship’s rail,”—the goods are considered to be delivered into the control of the buyer.

Advantages of FOB Contracts

The advantage of a FOB contract is that it is the most cost-effective solution for buyers. In this case, the buyers don’t have to pay a high cost to their sellers as they might have with CIF. Moreover, buyers have more control over freight costs and transit timing. because they are able to choose their freight forwarder. In case of any problem, they can better access the information of the freight and solve various issues.

Sellers also prefer FOB sometimes because they let them free from all the responsibility of the goods. Once the products leave their warehouse, sellers can mark the order as “complete” and not worry about any additional costs or problems.

Disadvantages of FOB

New buyers are recommended to use CIF because they don’t yet understand the intricacies of international shipments and possibly can make mistakes that can have severe penalties.

Meaning of CIF?

CIF or “Cost, Insurance, and freight “, often holds primary ownership with the seller until delivery. This means that the seller is responsible for risk and insurance costs until the goods reach the buyer’s nearest port. When you buy CIF, the sellers are responsible for everything involved with the shipping of goods from the seller to the buyer.

Advantage of CIF Incoterm

There are various advantages of CIF, especially for a buyer because they will probably choose to use CIF because of the convenience. When choosing CIF shipment, you don’t have to handle any risks, claims, or freight related concerns in transit. CIF is also the best option for some buyers who import a small batch of cargo, as the cost of insurance for small volumes may be higher than the fees charged by the sellers

Sellers may prefer to ship CIF because of higher profit margins but also it puts a lot more responsibility on the sellers.

Disadvantages of CIF

CIF is considered an expensive option than FOB for buyers because the seller decides all the factors such as the route, transit time, shipping company, freight insurance costs, and other factors that may affect the overall price. Moreover, buyers have to rely on the seller to provide the Importer Security Filing document, if the buyers delay filing this, there are serious fines and penalties. Furthermore, if something goes wrong with a CIF shipment, it will be difficult for the buyers to obtain accurate information because they don’t own the goods until they get the delivery.

Difference Between FOB and CIF?

CIF and FOB both describe international shipping agreements that specify when the ownership and liability of the goods transfer from seller to buyer.

In most cases, we recommend FOB for buyers and CIF for sellers. FOB saves buyers money and provides control, but CIF helps sellers gain a higher profit. However, we recommend that new buyers use CIF as they get accustomed to the importing process.

Tenaxx Logistics, the top transportation and logistics company in Ontario, Canada.

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