- Author :
- TATA AIG Team
- ●
- Last Updated On :
- 25/05/2024
- ●
- 2 min read
Shipping agreements play a crucial role in cross-border sales and distribution of goods. They help determine the party responsible for the goods when they are in transit and minimise potential issues.
There are several types of shipping agreements. Cost, Insurance and Freight (CIF) and Free on Board (FOB) are the two most popular international shipping agreements.
They are among the 11 International Commerce Terms (Incoterms).
Incoterms are international trade terms developed by the International Chamber of Commerce in 1936. They are usually similar to domestic terms but have an international application.
In this article, we will discuss the FOB and CIF meanings, the key differences between FOB and CIF and which one you should choose.
CIF Meaning: What is CIF?
CIF (Cost, Insurance and Freight) is a shipping agreement where the seller is held responsible for the risks and costs related to the goods in transit. In other words, a CIF agreement makes the seller responsible for the shipment until it reaches its destination. It is the port of destination where the seller’s responsibility ends and is shifted onto the buyer. The buyer is now responsible for the delivery of items from the port of destination to the warehouse.
The seller’s responsibilities included in CIF Incoterms are cargo insurance, freight charges, and other additional fees. The seller is also responsible for obtaining the required licenses, documentation, and inspection. Since the seller has more responsibility and control over the trade in CIF, it lessens the buyer’s burden. However, CIF is expensive for the buyer as the seller controls the entire procedure.
Advantages and Disadvantages of CIF Incoterms
CIF shipping agreement has its pros and cons for the buyer and the seller.
| Advantages of CIF | Disadvantages of CIF |
|---|---|
| Reduced risks for the buyer: The seller takes up the responsibility of transporting the goods safely to the destination. This reduces the buyer’s risk in case of loss or damage to goods during transit. | Increased costs: Since the seller handles transportation and insurance, CIF agreements offer less control to the buyer, leading to higher buying costs. |
| Seamless logistics: The CIF agreement makes the entire logistics seamless for the buyer as everything is looked after by the seller until delivery. | More complex: A CIF agreement can be more complex as it involves more parties and requires more documentation. |
| Suitable choice for small importers: A small buyer lacking expertise in international trade can benefit from CIF. |
What is FOB?
FOB full form in export is Free on Board. This shipping agreement makes the buyer responsible for the shipment the moment it leaves the port of origin.
The buyer looks after all the aspects related to the shipment, like selecting and paying the freight company, insuring the cargo, and other associated costs. The buyer is also responsible for unloading the goods from the ship.
Since the buyer can negotiate the costs related to transportation and insurance, the FOB clause in marine insurance is more flexible and affordable than CIF and other agreements. FOB contract also allows the buyer to cut costs by giving up some protections or insurance.
However, sellers may feel reluctant to take such risks as this may impact the quality of customer experience.
Advantages and Disadvantages of FOB
FOB also comes with several advantages and disadvantages. Let’s take a look at them.
| Advantages of FOB | Disadvantages of FOB |
|---|---|
| Reduced risk for the buyer: The buyer looks after the shipment once it leaves the port of origin. The greater control over the logistics reduces the risk of loss or damage during the transit. | Additional costs: FOB involves additional responsibilities like arranging insurance and transportation for the goods. This adds up to the cost for the buyer. |
| Reduced cost for the seller: In a FOB contract, the seller has to deliver the goods to the port of origin, load them onto the shipping vessel and leave the rest to the buyer. This reduces the costs for the seller. | |
| Less documentation: As compared to CIF, a FOB agreement requires less paperwork and custom clearance procedures. |
CIF vs FOB: Difference Between FOB and CIF?
The key difference between FOB and CIF is the party responsible for the goods during transit.
In CIF, the seller takes up the responsibility for transportation and assumes the costs and risks associated with goods like insurance and freight until delivery. However, FOB makes the buyer responsible for the costs and risks associated with the goods once loaded onto the shipping vessel.
This agreement relieves the seller of any liability once goods have “passed the ship’s rail”. It is the buyer who takes up the responsibility after that.
Most buyers choose a FOB agreement as they find it more cost-effective. They enjoy more control over choosing freight companies and insurance limits.
On the other hand, a CIF agreement can be costlier as the seller has more control over things. The seller may choose a costly freight company and a higher insurance limit to ensure the goods reach the destination without any risks.
| Point of difference | CIF Agreement | FOB Agreement |
|---|---|---|
| Party responsible | The seller is responsible until the goods reach the port of destination | The seller’s responsibility ends once the goods are loaded onto the ship at the port of origin. The buyer is responsible thereafter |
| Transportation cost | The seller bears the transportation cost to the destination point and includes it in the contract price | The buyer bears the transportation costs from the origin port and also the unloading costs |
| Insurance | The seller arranges and pays for the insurance coverage of goods | The buyer arranges and pays for the insurance coverage of goods |
| Risk of loss or damage | The risk of loss or damage to goods is shifted from the seller to the buyer when the goods reach the port of destination | The risk of loss or damage to goods is transferred from the seller to the buyer when goods are boarded onto the ship |
FOB or CIF: Which is Better?
CIF and FOB have unique advantages for buyers and sellers, and no option can be considered better. The one you pick for your business may depend on your specific requirements and risk preferences.
If you are a seller with know-how in local customs, you can bear the CIF responsibility. This can help you gain a competitive edge and encourage the buyer to accept the deal.
However, as a small vendor, you may want larger buyers to take responsibility for the shipment. In this case, you can choose a FOB agreement to lower costs.
If you are a buyer who lacks expertise in handling the shipment, CIF Incoterms may be a better choice to reduce your burden.
FOB agreement, on the other hand, can reduce your burden if you are a seller. It relieves you of all responsibilities as soon as the goods leave the point of origin.
However, customer service is key to building long-term relationships with customers. While a CIF agreement may involve more costs and time, it makes the entire process seamless for the buyer.
Wrapping Up
Understanding the differences between CIF and FOB agreements is crucial for international traders. While CIF places the burden of transportation and insurance on the seller, FOB puts the entire onus on the buyer once the goods are loaded on the vessel.
Analysing the pros and cons of both shipping agreements can help you make an informed decision that aligns with your risk appetite and trade goals.
Goods lost or damaged during transit can be a nightmare for any business owner. It is essential to buy marine cargo insurance to ensure the goods reach the point of destination safely on time.
Tata AIG offers a customisable marine insurance policy that will keep your cargo and vessel secure against unfortunate circ*mstances during their journey to the destination.
FAQS
What should I opt for - FOB or CIF?
This may depend on whether you are a buyer or seller and your specific needs and risk preferences.
However, as an umbrella recommendation, opt for FOB if you are a buyer and CIF if you are a seller. While CIF allows sellers to maintain a higher profit, FOB offers increased control to buyers and saves money.
What is the difference between CIF cost and FOB cost?
FOB agreements are usually cheaper from a buyer's perspective. This is because they have more control in choosing the freight company and insurance limits. On the other hand, CIF agreements can be costlier as the seller has more control over the shipment.
Does FOB include insurance and freight?
Considering the costs borne by the seller, FOB includes expenses like ex-factory costs of the goods, packaging charges, loading, documentation, and other transportation expenses. CIF, on the other hand, involves FOB costs as well as freight and marine insurance costs.
