At what point do imported products traveling across national borders switch from being the seller's property to being the buyer's property? Where exactly is ownership handed over? Who is liable for risk and costs while the goods are in transit? Understanding these questions is essential for effective transportation management.
International shipping agreements between buyer and seller help answer these questions in a legally binding way. The International Commerce Terms (Incoterms) of Cost Insurance and Freight and Freight On Board determine who assumes responsibility and liability for the goods at a given point along the transport line.
What's the difference between FOB and CIF and which is best for your business? In this blog post, we'll explore these different contracts and the shipping documents involved.
What Is FOB?
FOB refers to "free on board" or "freight on board." FOB terms have two parts: Origin or Destination and Collect or Prepaid.
- FOB Origin means that the buyer assumes the title of the goods at the point of origin. The moment that the shipper loads the goods onto the freight carrier, the buyer is responsible for the goods.
- FOB Destination means that the buyer assumes the title of goods at the point of destination. This means the shipper owns the goods while in transit.
FOB Origin is a much more common form of FOB, where buyers take all responsibility for the goods the moment they leave the seller's hands.
- 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, Freight Collect. This means that the buyer assumes ownership and responsibility for the goods once they leave their originating point. In this case, the FOB process is as follows:
- The seller loads the goods on the freight vessel of the buyer's nomination.
- The seller clears goods for export in their country.
- The freight hauler picks up and signs for the package, at which point the title of goods transfers to the buyer.
- The buyer is then responsible for insurance costs and risks associated with freight transport for the duration of transit.
Why Use FOB?
FOB price is usually the biggest draw for people. Buyers don't have to pay a high fee to their sellers as they might with CIF. Buyers also have more control over the freight timing and cost, because they are able to choose their freight forwarder. If anything happens to the goods, they hold the title and responsibility, so they can better access information and solve concerns.
Sellers also like FOB because they don't have responsibility for the goods. Once the products leave their warehouse, sellers can mark the sale as "complete" and not worry about any additional costs or problems.
Why Not Use FOB?
New importers should likely avoid FOB because buyers must retain more liability for the goods while in shipment. Those who don't yet understand the intricacies of overseas shipments could experience mistakes which can carry severe penalties.
Instead, new buyers might choose a Cost Insurance and Freight contract until they better understand the importation process.
What Is a CIF Contract?
Cost Insurance and Freight often holds primary ownership with the seller until delivery. With a CIF contract the seller pays or is otherwise responsible for risk and insurance costs until the goods reach their final destination. Ownership and liability transfer from the seller to the buyer the moment the goods pass the boat's railing at their port of destination.
In this way, sellers are responsible for everything involved with shipping. They must provide the necessary shipping documents for both countries, pay insurance costs, and are liable for the safe delivery of the goods.
Why Use CIF?
If you are a buyer, you may choose to use a CIF contract because of the convenience. You don't have to handle any risks, claims, or freight concerns in transit. This is especially important for new importers who aren't sure of the intricacies of shipping overseas. Many importers will also use CIF contracts if they are shipping a small batch of cargo, as the cost of insurance for small volumes may actually be higher than the fees charged by sellers.
Sellers may prefer to ship CIF because they can generate higher margins. Nevertheless, ownership of the goods in transit places an additional risk on sellers.
Why Not Use CIF?
Cost Insurance and Freight tends to be a more expensive agreement than FOB for buyers. Often, sellers will invoice buyers for their costs of shipping and insurance. They may even add in additional fees to make a larger profit. In this way, buyers end up paying more for shipping than they would with a FOB agreement.
Basically, buyers are paying a premium for convenience. Moreover, buyers are relinquishing control over their shipment. If something goes wrong with a CIF shipment, buyers have a much harder time obtaining accurate shipping information because they don't technically own the goods. Furthermore, buyers have to rely on the seller to provide the Importer Security Filing document; if buyers file this late, there are serious fines and penalties. This reliance on the seller can put buyers in a vulnerable position.
Insurance can also be interesting to navigate with CIF. Most often, the seller is the beneficiary of the insurance, because they own the insurance policy and the goods while in transit. This means that if something happens to the goods during shipment, the seller receives the payout. Likely, the buyer has already made some form of payment to the seller for those goods. In this way, the seller then has to reproduce the goods for the buyer or reimburse the buyer with their insurance money. This can often create legal and communication concerns, particularly when resolving a CIF damage claim.
Final Thoughts
The major difference between FOB and CIF is mostly evident when liability and ownership transfer. In most cases of FOB, liability and title possession shift when the shipment leaves the point of origin. With CIF, responsibility transfers to the buyer when the goods reach the point of destination.
In most cases, we recommend FOB for buyers and CIF for sellers. FOB saves buyers money and provides control, but Cost Insurance and Freight helps sellers have a higher profit. However, we recommend that new buyers use CIF as they get accustomed to the import process.