When sourcing goods from abroad, you may encounter suppliers that use terms such as FOB price or CIF shipping price. Alternatively, you may find suppliers that offer FOB or CIF shipping options depending on the type or quantity of goods you plan to buy.
So, how do you make the right decision when presented with either of these options? Through analysis. When you understand what both shipping terms mean, you can weigh their provisions against your shipping needs and identify an ideal solution.
As such, on today’s comparative blog we examine FOB vs CIF shipping terms, their pros, cons, and what they are best suited for. By the end, you will likely have a much easier time deciding between the two.
Let’s learn more, shall we?
FOB and CIF Defined
FOB stands for ‘Free on Board‘. The core rule of this shipping term is that a seller has to transport goods to a nominated port of export, clear them, and ensure that they are loaded onto the shipping vessel.
In contrast, CIF stands for ‘Cost, Insurance, and Freight’. It is a shipping Incoterm that requires a seller to handle all the processes and costs of preparing and transporting the goods to a nominated destination, and providing insurance cover for them while they are in transit.
Based on these definitions, FOB and CIF Incoterms certainly stand out from each other but they also share some key similarities. For better context, let us examine each of them in more detail before comparing them.
Free On Board (FOB)
FOB shipping terms are only applicable to goods being shipped via inland waterways, sea, or ocean. The expression ‘Free On Board’ stems from the fact that, under these Incoterms, the buyer does pay for or handle any processes until the goods are on board the vessel.
Consequently, if a buyer and a seller agree to use FOB shipping terms, they would need to nominate a port where the seller should deliver the goods. Once this is done, FOB Incoterms assign responsibilities to the seller and the buyer as follows:
The Seller’s Responsibilities
- Prepare the goods based on the buyer’s order
- Pack the goods in safe packaging that is suitable for freight or as agreed with the buyer
- Arrange and pay for the goods to be loaded onto a local carrier
- Deliver the goods to the nominated port
- Clear the goods for export
- Pay any export clearance fees that arise
- Hand over the goods to the export carrier chosen by the buyer
- Pay loading fees and ensure that the goods are loaded onto the shipping vessel
- Obtain the relevant shipping documents and share them with the buyer
Responsibility for the goods transfers from the seller to the buyer once the goods cross the ship’s rail and are considered on board the shipping vessel.
The Buyer’s Responsibilities
As the seller is preparing the goods, the buyer should find a carrier that will transport the goods from the export country to their destination. A buyer can also arrange and pay for transit insurance for their goods.
Once the seller hands over the goods to the chosen carrier, the buyer should:
- Pay transport fees to the export carrier
- Track the shipment
- Arrange and pay for the unloading of the goods when they arrive
- Clear the goods through customs and pay any import fees that arise
- Organize and pay for the loading and transportation of the imported goods to their premises
Advantages and Disadvantages of FOB Shipping Terms
Advantages to the buyer:
- The seller handles all export clearances and costs in the country of export which is convenient especially if the buyer is not familiar with export processes in that country.
- The buyer can negotiate and arrange for export shipping that is favorable to them.
- The seller assumes all risks until the goods are on board the ship.
Advantages to the seller:
- Under FOB rules, a seller does not have to handle any shipping liabilities or import processes at the port of destination
- Sellers take on very few tasks under FOB Incoterms. This saves them time, money, and other factory resources.
- It is easier for a seller to obtain the requisite shipping documents after paying and overseeing the loading of the goods.
Note: Shipping documents are essential as they are usually used as proof of delivery and to initiate payment especially where the buyer used a Letter of Credit.
Disadvantages to the buyer:
- All risks that may arise during the shipping or unloading of the goods at the destination port are the buyer’s responsibility.
- It can be difficult, more so for inexperienced importers, to find a reliable export carrier and negotiate fair terms.
- FOB shipping terms can only be used for inland waterway, sea, or ocean freight. A buyer would, therefore, have to negotiate different Incoterms if their shipping needs change.
Disadvantages to the seller:
- Sellers shipping under FOB rules bear all the risks until the goods are loaded onto the vessel. This can sometimes be costly especially if clearances are delayed and the cargo starts to attract demurrage charges at the port.
- Carriers are not always willing to provide sellers with shipping documents because under FOB, it is the buyer that contracts the carrier and not the seller. The seller may have to request the buyer to instruct the carrier to share the documents.
Cost, Insurance, and Freight (CIF)
Under CIF Incoterms, it is the seller’s responsibility to transport the goods to the buyer. The delivery destination is often a shipping terminal because CIF terms are only used for cargo being exported via sea/ocean freight.
Once both parties agree on a delivery destination, their responsibilities are shared as follows.
The Seller’s Responsibilities
In accordance with CIF Incoterms, the seller would first have to find a suitable export carrier to ship goods to the buyer’s port. They would also need to find and contract an insurance provider to provide insurance coverage for the goods in transit.
The seller is further mandated to:
- Prepare the goods and pack them in a manner suitable for freight or as requested by the buyer.
- Transport the goods to the agreed export carrier
- Clear the goods for export and pay any requisite export clearance charges
- Pay the freight charges for shipping the goods
- Pay any terminal handling charges that arise
- Obtain shipping documents from the carrier and share them with the buyer
Even though it is the seller’s responsibility to pay for freight and shipping insurance, responsibility for the goods transfers to the buyer once the seller delivers the goods to the export carrier.
As a result, the buyer can only seek compensation from the insurer if any damage or loss of goods occurs after the seller has handed over the goods to the carrier.
It is also important to mention that Incoterms 2020 (the most recently published Incoterms) state that sellers should insure goods for at least 110% of the value of the contract. This ensures that buyers are fully cushioned from risk.
The Buyer’s Responsibilities
- Track the shipment once the seller hands over the goods to the carrier
- Clear the goods through customs once they reach the port of destination
- Pay any import and terminal handling charges that arise
- Organize and pay for loading and transport to their premises
Advantages and Disadvantages of CIF Shipping Terms
Advantages to the buyer:
- The buyer does not have to handle any export logistics because they are all assigned to the seller.
- The goods in transit are insured and thus the buyer is protected from financial loss.
Advantages to the seller:
- The seller can choose a shipping carrier and insurance provider within their budget and secure their profit margins.
- It may be easier for a seller to obtain shipping documents under CIF rules because it is the seller that contracts the carrier.
- The seller is responsible for paying freight and insurance charges but their responsibilities over the goods end at the port of export.
Disadvantages for the Buyer:
- It may be convenient to have a seller handle export logistics but this may end up costing the buyer more than if they had negotiated the export logistics for themselves.
- Sometimes the carrier or insurance provider that a seller chooses may not be the most reliable option.
- CIF rules make it such that if a buyer needs to claim compensation, they have to handle it with little or no help from the seller because the seller is no longer liable for such issues.
Disadvantages to the seller:
- Shipping charges tend to rise during high traffic seasons like just before the Chinese New Year when businesses across the world are looking to beef up their stocks before their suppliers close.
- It is not always easy to find a trusted shipping insurance provider that is authorized to settle claims in the buyer’s country.
- Conditions, such as those of a Letter of Credit, can make fulfilling seller obligations under CIF more complex than it needs to be.
Key Differences: FOB vs CIF Shipping Terms
So far we have established that FOB and CIF are tied to inland waterway, sea, and ocean transport. Additionally, both of these Incoterms state that:
- The seller is responsible for export clearances and delivering the goods to the export carrier.
- The buyer is responsible for handling all import clearance processes and fees.
You are, therefore, probably wondering: what are the differentiating factors that could make FOB more preferable than CIF? Let’s examine a few of them.
Cost
FOB shipping is likely to be cheaper for a buyer than CIF shipping. This is because:
- Under FOB, the buyer can find a reliable and cost-effective shipping carrier and even negotiate more favorable terms.
- The responsibilities and costs incurred by the seller under FOB are fewer than under CIF. Subsequently, even if the seller chooses to include the costs of FOB shipping in the final price, it may not inflate the price as much as CIF costs.
- Insurance, though essential, is optional under FOB. This can help you save on costs if you are sourcing on a tight budget or if you are shipping a small package of low value.
Insurance
Transporting goods via any means is risky. However, transporting goods via water transport has statistically been proven to present a higher risk.
Under FOB, the seller is not obliged to provide any insurance coverage. On the other hand, under CIF, shipping insurance is a mandatory requirement that the seller must fulfill.
Subsequently, if you would like to shield your business from the risk of loss due to damaged or lost goods, CIF may be a better option for you than FOB.
Containerized vs Non-Containerized Goods
In sea/ocean shipping, carriers tend to offer 2 main options: Full Container Load (FCL) shipping or Less-than-a-Container Load (LCL) shipping.
In a nutshell, a full container load means you can lease a container and only pack your own goods inside it. In comparison, a less than a container load means your goods would be consolidated and packed in a container alongside the goods of other shippers
FOB shipping terms are recommended for containerized goods (FCL). This is because it is easier for a seller to deliver the container to the vessel for loading and fulfill their shipping obligations.
Meanwhile, if you are shipping non-containerized goods, CIF shipping terms may be more ideal. This is because a seller would still be able to fulfill their obligations even if they have to deliver the goods to a carrier’s warehouse for consolidation.
FAQs on FOB and CIF Incoterms
What Is the Meaning of ‘CIF Price’?
When a seller quotes a price as a ‘CIF Price’ it means that the indicated price includes the cost of shipping the goods under CIF terms.
A more specific quote may also include a destination. This is more ideal because shipping costs vary between destinations and thus quoting a specific location may give a more accurate figure.
Which Is Better: FOB or CIF?
The answer to this question would depend on your shipping circumstances.
FOB would be better in situations where you:
- Require convenient but cost-effective shipping terms
- Are shipping a full container load
- Prefer to choose your own shipping carrier
In comparison, CIF may be more ideal if you:
- Are shipping a full container load or shipping goods that fill less than a container
- Prefer the protection that shipping insurance provides
- Prefer your seller to handle all the export logistics on your behalf
What Is FOB, CIF, and CNF?
CNF means ‘Cost and Freight’. It is similar to CIF because CNF rules also require a seller to organize and pay for transport to the buyer’s port. However, under CNF a seller is not obliged to provide any insurance cover for the goods in transit.
Based on this, CNF can be said to be a compromise between FOB and CIF. It still offers the convenience of a seller handling export processes and transport costs without the extra cost of insurance.
In Conclusion
It can seem unnecessary for a seller to have both FOB and CIF shipping terms as they are both restricted to water freight. However, having access to both options is a massive advantage because they each offer something unique.
The tips you have learned from this guide would undoubtedly make it easier to find the right solution for your shipping needs. Still, negotiating shipping terms can be time-consuming and confusing. So, why not delegate it to experienced professionals?
We, at NicheSources, provide all-around product sourcing services. We would advise you on hassle-free shipping terms for your business, negotiate the terms with your suppliers, and coordinate the global shipping of your goods.
Ready to elevate your business operations? Simply send us a brief of your sourcing and shipping requirements and request a free quote.
