The Difference Between CIF and FOB

If shipping is part of your business, it’s important to become familiar with International Commerce Terms (Incoterms). The International Chamber of Commerce has established Incoterms. By knowing these terms and their meanings, you can follow a more accurate way. Also, knowing the rules and standards will keep you safe as a buyer or seller. Incoterms to know include CIF and FOB. They specify what buyers and sellers need to know and their responsibilities. 

There are some differences between CIF and FOB. Differences come with different responsibilities. Thus, we explained the differences between CIF and FOB in detail for you.

What is CIF?

CIF stands for cost, insurance, and freight. The seller is responsible for the cost, insurance, and freight. CIF is a shipping agreement. This agreement specifies the seller’s responsibilities and the fees he must pay. The seller pays these fees to cover costs, insurance, and freight. These costs incur while the cargo is in transit. Only goods transported via waterways, sea, or ocean are subject to CIF. Hence, other forms of shipping are not subject to CIF. 

In general, CIF applies to large, heavy, and bulk items. According to CIF, the seller is responsible for the cargo until it reaches the port of destination. The seller is also responsible for export clearance. Thus, ownership of the transport remains with the seller until delivery. For this reason, the risks that occur until the transport reaches the buyer’s port are the responsibility of the seller. In this process, the seller must cover the damages. Moreover, the seller is responsible for the additional factors such as customs duties and paperwork required for the goods.

However, the responsibility passes to the buyer as soon as the goods reach the port of destination. For example, the buyer should pay the unloading costs. Besides, the buyer must ensure that the transport reaches the final destination. Also, the buyer bears the costs incurred in this process.

Responsibilities Required by CIF

CIF comes with some responsibilities for both buyers and sellers. Sellers take responsibility for all export and transport of the cargo until the goods reach the ship. After loading, the responsibility of the shipment passes to the buyer. Responsibility remains with the seller until the products reach the final destination. Apart from these, we can explain the responsibilities of both parties in more detail.

Responsibilities of Sellers

• Licenses: Sellers must obtain export licenses for the goods. Thus, they must pay the fees required for these licenses.
• Packaging: The seller must ensure that the cargo is properly packaged. Sometimes some countries require special marks on the packages. The seller must also provide these markings according to the rules of the countries. As a result, sellers are responsible for making the cargo suitable for export.
• Loading, Carriage, and Origin Terminal Charges: The seller is responsible for the costs of loading the shipment from the seller’s warehouse to the first carrier. The seller pays the fees required for the transfer of the cargo to the vessel. Besides, the seller must pay the delivery fees at the loading port.
• Export Duty, Taxes, and Customs Clearance: The seller must bear all customs costs associated with the export of the goods.
• Insurance: The seller must pay for the insurance of the goods. The insurance he must pay covers the period until the shipment reaches the port of destination.

Responsibilities of Buyers

• Delivery to Final Destination: The seller is responsible for transporting the cargo from the port to the final delivery point. Thus, he should organize the necessary logistics for this process.
• Unloading: The buyer bears the unloading costs after the cargo reaches the delivery place.
• Destination Handling Charges: Another name for Destination Handling Charges is destination terminal charges. The buyer bears the unloading-related costs required to transfer the cargo within the terminal.
• Import Duty, Taxes, and Customs Clearance: The buyer must pay the import-related fees and customs fees for import.

What is FOB?

FOB stands for Free on Board. FOB is a shipping agreement. It is the responsibility of the buyer from the moment the shipment leaves the port of departure with FOB. FOB requires the buyer to choose the shipping company, insure the shipping, and pay some costs.

With FOB, the buyer assumes responsibility once the goods have passed the ship’s rails. This happens at the point of origin. Full responsibility passes to the buyer from the moment the goods begin their journey. The buyer should pay for transport, insurance, and other costs. In addition, the buyer is responsible for unloading the goods from the vessel in FOB.

Responsibilities Required by FOB

As we mentioned above, the responsibility passes to the buyer as soon as the shipment leaves the port of departure. But, it would be useful to explain the responsibilities of the parties in more detail.

Responsibilities of Sellers

• Packaging Fees: The seller must bear the packaging costs of the exported items.
• Export Duty, Taxes, and Customs Clearance: The seller is responsible for paying customs duties and taxes related to export.
• Loading and Delivery: The fees for the loading and delivery of the goods to the seller’s port are the seller’s responsibility.
• Transfer, Loading, and Handing: The seller must bear the costs of loading the goods, such as the transfer fee.

Responsibilities of Buyers

• Freight Charges: The buyer bears the freight charges in the process of sending the cargo from his port to the buyer’s port.
• Insurance: The buyer should pay the freight insurance charges. But the buyer may not take out insurance if he wishes. Thus, insurance is optional.
• Unloading and Delivery to Final Destination: The costs of unloading at the buyer’s port and delivery to the final destination belong to the buyer.
• Import Duty, Taxes, and Customs Clearance: The buyer is responsible for paying customs duties and taxes related to the import.

Key Differences Between CIF and FOB

The key difference between FOB and CIF is the point where responsibility passes from the seller to the buyer. In FOB, responsibility transfer happens when the shipment reaches the point of origin. With CIF, the seller is responsible for the goods until they reach the destination port.

Another difference between FOB and CIF is the costs. Generally, FOB is a more cost-effective method than CIF. Because with FOB, sellers can negotiate rates. Also, it is up to the buyers to choose insurance policies by price or to work with low-priced companies. Yet, if you are new to international trade, CIF may be a better option. Furthermore, if your cargo is small, CIF may be more suitable for you. CIF makes the process smoother for the buyer, even if it costs more.

In conclusion, CIF and FOB have their own pros and cons. Choosing one of the two according to your situation gives you different advantages. 

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