What Is the Difference Between CIF and FOB?

CIF and FOB are two incoterms you need to know if you run a business or dabble in shipping. Even if you don't, knowing these international commercial terms can help you understand what exactly goes into your shipment costs. And, of course, these terms have vastly different definitions.

It's easy to mistake Cost, Insurance, and Freight with Cost and Freight. Free On Board is different from Free Carrier or Free Alongside Ship. These 11 terms are international shipping agreements that the ICC has established. The terms have been used in international commerce since 1936 and are updated periodically.

Learn more about CIF, FOB, and their differences to get the best out of your shipping arrangements.

Cif1

What Does CIF Mean?

CIF stands for Cost, Insurance, and Freight. As the name suggests, the seller is responsible for the shipping cost and cargo insurance. The seller is also responsible for obtaining all the required documents to export the goods. CIF is an exclusive incoterm used for ocean freight, usually used for oversized deliveries.

The buyer becomes fully responsible when the goods arrive at the destination port. The buyer pays related fees like customs, import duty, and taxes. They're also in charge of unloading and handling the goods at the destination. Any documents the transport carrier holds are handed over to the buyer to clear the goods after payment.

The seller's responsibilities under this agreement are:

  • Product delivery to marine transport
  • Paperwork
  • Packaging
  • Any transportation from warehouse to port in the country of origin
  • Customs fee, export duty, taxes in origin country
  • Terminal handling in the origin country
  • Main carriage for international shipping
  • Cargo insurance

Meanwhile, the buyers are responsible for:

  • Customs fees, import duties, and taxes in the destination country
  • Handling fees and any additional costs in the destination country
  • Transportation from destination port to final address

Insurance's role in CIF

The role of insurance is highly vital in CIF. It's the point that separates cost, insurance, and freight arrangements from a similar arrangement, CFR (Cost and freight). These two arrangements are identical, except for the insurance costs. Under CIF, the seller is contractually required to pay for insurance coverage for the cargo.

In reality, many customers usually prefer CFR because, under CFR, the buyer takes care of the insurance costs. The buyer can obtain higher insurance coverage than the seller offers under CFR.

Is CIF better than FOB?

Using a CIF incoterm for your shipping arrangement is better for these situations:

  • Buyers should use a CIF arrangement when dealing with international sellers. International sellers may have more direct access to vessels, whereas buyers may only have limited access.
  • Using a CIF arrangement is good if a buyer is not particularly experienced in international shipping. CIF doesn't require the buyer to have expertise in logistics and shipping, so the buyer is concerned only with taking over the goods once they arrive.

However, CIF is usually more costly than FOB. Depending on the products shipped, using a FOB arrangement may be more advantageous.

How do you define FOB (Free On Board)?

FOB, short for Free On Board, is an invoice that gives the buyer plenty of flexibility and control over the shipment. Under this agreement, the seller only controls the goods until they are loaded onto a ship at the origin. This means the seller only pays for the goods to be moved and loaded onto the vessel.

After that, the products belong to the buyer. The buyer assumes complete liability as soon as the journey begins. This includes transport, insurance, and all additional charges. Then, at the destination, the buyer is again responsible for handling and clearing the goods.

The seller's responsibilities under FOB are:

  • Product delivery to sea transport
  • Paperwork
  • Packaging
  • Customs fee, export duty, taxes in origin country
  • Terminal handling in the origin country

Meanwhile, under FOB, the buyer is responsible for:

  • Main carriage for international shipping
  • Customs fees, import duties, and taxes in the destination country
  • Handling fees and any additional costs in the destination country
  • Transportation from the port of destination to the final address
Cif2

Variations in FOB

There are four variations in FOB arrangements. Each differs in where the buyer takes control of the shipment and who is responsible for the costs. Take a deeper look at each variation.

FOB origin, freight prepaid

  • The seller oversees the transporting of products to the port of origin
  • The seller pays for the freight cost
  • The buyer takes over the risk after the goods are loaded onto the ship
  • The buyer takes care of any other transportation costs and risks

FOB Origin, freight collect

  • The seller oversees the transporting of products to the shipment port (origin)
  • But it's the buyer who pays for the freight cost.
  • The buyer also takes over the risk from the seller when the goods are on board the ship.

FOB Destination, freight prepaid

  • The seller is in charge of transporting the products to the destination port.
  • The seller pays for the freight cost.
  • The buyer is accountable for the risk when the goods arrive at the destination port.
  • The buyer is responsible for all further transportation fees and risks from the destination port.

FOB Destination, freight collect

  • The seller is in charge of transporting the products to the destination port.
  • But it's the buyer who pays for the freight charge
  • The buyer is accountable for the risk when the goods arrive at the port of destination

Which one is the most commonly used arrangement in international shipping? You would be right if you guessed it was FOB Origin, freight collect.

Under the FOB Origin, freight collects variation, and the seller's role is fulfilled once the products are on board the freight carrier. That's where the buyer assumes control over the costs and risks. The buyer will then be free to arrange the shipment as they desire, although all potential risks also fall under the buyer's responsibility.

Insurance's role in FOB

FOB agreements do not require insurance from either party. However, getting the cargo insured is still common practice because insurance is usually required for international shipping. Both parties can negotiate to cover the insurance; one or both parties can provide the insurance.

Is FOB better than CIF?

For the buyer, it can be a better idea to use FOB. It's the type of contract that allows buyers to negotiate a cheaper freight cost and insurance. Buyers can also choose a freight forwarder of their own. Some international traders even apply FOB for the goods they buy from other countries but will use CIF when selling to other countries. Combining these methods can maximize profits.

However, it's not recommended if the buyers have little experience or expertise with logistics and shipping. This is because:

  • FOB requires more coordination and oversight from the buyer. The regulations can be complicated, so that the process will consume more time.
  • The buyer has to take on more responsibilities and risks of the goods. If loss or damage occurs, the buyer will have to bear the cost and deal with filing insurance claims.
Cif3

CIF and FOB Compared

We compare the main differences between CIF and FOB to make it easier to understand.

CIFFOB
Transportation costThe shipping cost of the items from the seller's warehouse to the destination port is under the seller's control. The seller only controls the items transported to the shipment port. Once on board the ship, the buyer takes control of the costs and the risks.
InsuranceCargo insurance is the seller's responsibility to provide. The seller must pay marine insurance until the items reach the destination port.The insurance is negotiable between both parties.
Risk of loss/damageThe seller is liable for any risk of loss or damage until the items board the ship at the port of origin.The risk gets transferred to the buyer when the items are loaded onto the ship at the port of origin.
Delivery to destinationUntil the items reach the port of destination stated in the contract, the seller must control and oversee the items' delivery.The seller only takes care of the items until they reach the port of origin. After that, all the way to the port of destination, the buyer takes over.
Additional costsThe seller covers all costs of getting goods to the destination port (freight, insurance, and other charges).The buyer covers all costs beyond the port of shipment (ocean freight, unloading, transportation from the destination port to the final address). Insurance is still negotiable.

Which One Should I Use?

Both arrangements have benefits and drawbacks. Your business model and goals will decide which can give you optimum benefits.

CIF gives the sellers more control and profits by setting the terms of the shipping process under the agreement. The buyer may also benefit from CIF as they only have to wait for the products' arrival and collect them without any worries. But CIF is pricier, with a higher shipping cost and limited access on the buyer's side.

Meanwhile, FOB is much more advantageous for buyers as they have more liberty to arrange the shipment and deal directly with carriers and insurance providers. They have more control under this agreement. FOB shipping is also the more affordable option. However, inexperienced buyers without in-depth knowledge of international trade may flounder with this arrangement.

If you need help shipping overseas, trust a reliable shipping company like A1 Auto Transport. Our international moving service provides you with various options for shipping arrangements. Get your free moving quote today.

Comments

Post a Comment

Popular posts from this blog

Can I Take My Yacht Anywhere?

Image
For those who want to experience the freedom of the open waters, yachts have always been a choice to enjoy without worrying about sharing a cruise with hundreds of other people. They have always been popular, but after the pandemic, yachts became even more of a sought-after property. Especially now that people have remote jobs, different schedules, and the chance to combine business and pleasure, it fuels many to invest their money in a yacht. But then, the question arrives: can you take your yacht anywhere? Let's find out together. What do you need to drive a yacht? Since this type of vessel can give you extreme freedom, you may be tempted to explore the waters all around the world and visit other countries. However, before you leave, you must ensure you have everything you need for a safe journey. Documents First of all, you need a recognized license to drive your yacht . For example, this is a common requirement if you are renting a yacht. You need to check the legislation of wh...
Read more

What You Need to Consider When Budgeting for Your EV Transport

Image
When it comes to transporting electric vehicles (EVs), one of the most crucial parts of the process is making a budget. However, it can be daunting to decide which path to take with so much advice and many choices. To help you make the best decision for your needs, we've put together some key things to consider when planning for your EV transport and an estimation of your shipping costs. What Are the Specifics of Transporting Electric Vehicles? Transporting electric vehicles (EVs) requires special handling due to their unique power source. EVs must be transported with the battery disconnected and charged to a safe level for transport. The vehicle should also be secured properly in the trailer or truck bed, as any sudden movements could cause damage to the battery or other components. Additionally, it's important to ensure that the transport vehicle has enough power to keep the battery charged during transport. Is it Safe to Ship An EV? Transporting an electric vehicle (EV) is ...
Read more

The Top 10 Most Expensive Motorcycles to Transport

Image
How much do you think luxury motorcycles cost these days? Have you ever considered what goes into securely moving a machine of this caliber? The purchase of a million-dollar motorcycle might not be out of the question if you have sufficient financial resources. The larger difficulty is how to get it there. They are, after all, quite powerful equipment, and transporting them requires great care. Here are ten of the world's most desirable and expensive motorbikes, coupled with a detailed guide to safely transporting these bikes. Top 10 Most Expensive Motorcycles There are a wide range of motorcycles available, from the modestly priced to the extravagant. The world's most costly motorcycles are technological marvels and pieces of art. Shipping a motorcycle is expensive, whether you're relocating it across town or across the nation. The top 10 most costly motorcycles to ship are as follows: 1. Neiman Marcus Limited Edition Fighter – $11 Million Motorcycle enthusiasts have heap...
Read more