When and Why Should You Use CIF?
When it comes to international shipping, there are many factors which businesses need to carefully consider. In terms of liability and ownership, disputes arose so frequently in the past that the International Chamber of Commerce (ICC) outlined a set of 11 separate rules with the goal of defining where international trade ownership begins and ends.
These 11 rules are known as Incoterms (International Trade Commerce Terms) and they are recognized as the law with regards to international trade.
One type of agreement that can be used between buyer and seller is known as Cost, Insurance, and Freight (CIF). CIF is compatible with the 11 Incoterms and is a popular choice for both buyers and sellers.
Another popular type of shipping agreement is known as Freight on Board (FOB). This type of agreement is generally seen as the opposite of CIF. However, the differences are slightly more nuanced.
For more of a description of the differences between CIF and FOB, check out this blog post.
What is CIF?
A Cost, Insurance, and Freight shipping agreement is a type of contract that specifies that the seller bears the entirety of the risk throughout the entire shipping process. This means they are responsible right up until the moment the shipment crosses the threshold at the final destination.
Once the goods have made it to this point, ownership and liability now lie solely with the purchaser.
When and Why Should a Seller Use CIF?
At first glance, it seems like sellers should shy away from using CIF whenever possible. After all, who wants to assume extra liability if there are other options available that can distribute the risk to other parties?
But upon deeper consideration, there are a couple of reasons why some sellers might actually prefer a CIF agreement:
Obviously, if sellers take on all of the liability costs and other associated fees, they’ll stand to see some serious monetary benefit from the transaction for taking on the risk. There is a trade-off that happens. Therefore, shipping profit margins are often higher in CIF agreements.
Because sellers are assuming the liability risks with CIF, they have some more control over what the shipping process will look like. Ultimately they have somewhat more of a voice in how the shipment is handled. Sellers can carefully design or alter their shipping strategy to ensure maximum profit and minimize loss.
Therefore, in situations where:
- You feel very confident in the inherent level of risk in the shipping process;
- Have a team that you trust will deliver your shipment without damaging goods;
- Think that you can make a significant profit;
A CIF shipping agreement may be the right decision for you.
When and Why Should a Seller Not Use CIF?
On the other side of the coin, there are some times when a seller may balk at the thought of using CIF.
Lack of Trust in the Buyer
If you’ve never worked with a buyer before, and you’re getting a feeling that they may not be very trustworthy, you may not want to use CIF. You may feel as if they will try to pull some tricky move on you at the last minute in an effort to back out of the deal. While this would likely warrant some legal action which would ultimately result in your vindication, the effort and time lost could put you in a tough spot.
These situations, while unusual, certainly bear consideration when contemplating a CIF agreement as a seller.
New Crew or Workers
If you are working with employees or a crew who are just starting out, you may hesitate to take the lion’s share of liability with regard to your shipment. After all, if something goes wrong prior to or during delivery, you are responsible.
The Seller’s Company is Much Smaller Than the Buyer’s
If you are dealing in B2B, if your company is much smaller than the buyer’s, the risk is generally going to be higher for you. A larger company will often have more resources at its disposal. While a delay or loss resulting from damaged goods would cause a setback regardless of company size, bigger companies can usually recover more quickly.
Bottom Line: Should You Use CIF?
So, should you use CIF?
Ready for the frustrating answer?
It depends. There are tons of factors that go into whether you should stick with CIF or look into other agreement types. When you strip away all of the philosophies and extraneous details, it comes down to the following:
Those who got the CIF route will likely generate more profit but will take on a considerable level of risk and responsibility in order to do so.
Take a look at your company, determine what will work best for you, and decide on your shipping agreement strategy from there.