CIF and FOB are shipping agreements for international trading between a buy and seller. Knowing which to purchase in different situations concerning international trade can be tough, but there are a few guidelines and general preferences among those who specialize in it. Most dealing in international shipping usually buy FOB and sell CIF, and you’ll see why. Here are a few points to keep in mind when making this buying decision.
What is CIF?
CIF stands for Cost Insurance and Freight. With CIF the seller is responsible for paying for the costs and freight includes insurance to transport the good to the port of destination. The risk is then assumed by the buyer once the freight has been loaded to the ship.
What is FOB?
FOB stands for Free On Board. With FOB the seller must load the shipment of goods on board themselves to the ship chosen by the buyer. The seller must also clear the products for export. In this case, once the goods are loaded and cleared for export, the risk and cost are divided between the buyer and seller.
Each of these different agreements provides drawbacks and advantages for both parties. Most sellers prefer FOB due to the lack of responsibility on their part while more buyers prefer CIF for its hassle-free setup. However, most can agree on one or the other for their preferred method, depending on the agreement’s needs.
Why Buy CIF?
With Cost Insurance and Freight, simply put, the buyer relinquishes most of the control over the freight but assumes more of the risk. But CIF may be the best option for you if you are new to international trading or are only shipping a minimal amount of goods. This is the hassle-free option, as the seller is responsible for ironing out the details of shipping and insurance. It will get your good from one place to another with ease on your part, but it may also mean you’re paying extra costs since it’s out of your hands. The seller can markup fees to make more profit.
If you start buying more, CIF can present some issues. Obtaining accurate information about your shipment may be more difficult as CIF shipments increase. Overseas suppliers have no risk or responsibility once the port of destination has been reached. Any issues in transit that arise will not be their responsibility, and they will likely not help you. Delays in shipping can become costly, and without more control, these may be out of your hands completely. The carrier, in this case, doesn’t work for the buyer. Their agreements are not with the buyer, and there’s no reason for them to attempt to accommodate the buyer.
When purchasing CIF, remember that you may end up paying duty on the freight and shipping charges added on by your supplier. It can be challenging to differentiate these costs from the actual value of the invoice plus these costs cannot be estimated, and proof of payment must be shown to US Customs. This problem doesn’t exist in FOB since those charges would not be in the selling prices.
Why Buy FOB?
Free on Board is the general recommendation of most shippers for a few reasons. There are two benefits to buying Free on Board over CIF. Basically, in being in charge, you have more control of freight costs and the freight itself. You can shop competitively for better freight rates without blindly trusting the other party. You will be able to obtain accurate updates in a timelier manner using your freight-forwarded, and they will be able to assist you better if you have any issues along the way. Having a logistics partner, you’ve chosen will have your interests in mind, unlike your suppliers. FOB is generally the best option for buyers.
With CIF, goods are only insured to the destination port, so anything that occurs after is all on the buyer. The buyer, in this case, must also be ready to handle fees and customs as soon as the good arrive.
Both Cost Insurance and Freight and Free on Board offer advantages and disadvantages in a trade agreement. CIF is great for those not as familiar with international freight or those with minimal amounts of cargo which may want a less hands-on approach especially if the seller is more familiar with the process and can handle it for the buyer. FOB is better for those buyers who are more familiar with the process and want more control over their freight shipments by choosing their carriers and partners.
Always makes sure you’re choosing the best for you, your business, and your bottom line. Choose a logistics partner who will help you through the process and has your best interests in mind.