As a wholesaler, shipping agreements play a huge role in your sales and distribution process. This determines who is responsible for goods while they are in transit between the seller and buyer. There are many different options for shipping agreements in importing and exporting.
That is where Cost, Insurance, and Freight (CIF) and Free on Board (FOB) come into play.
CIF and FOB are among the most commonly used international shipping agreements laid out in the International Commercial Terms (Incoterms), which is a set of guidelines created by the International Chamber of Commerce (ICC).
In this post, we’re going to talk about the difference between CIF and FOB. We’ll compare these two shipping agreements, and we’ll discuss some things to consider when choosing a shipping agreement for your international shipments.
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What is a shipping agreement?
Basically, a shipping obligation determines which party, the buyer or seller, is responsible for the order while it is in transit between shipment and delivery.
This is especially significant in situations of cross-border trade. This is because the shipments typically travel through international waters and are subject to different rules and regulations. Having everything clearly documented in terms of who is responsible for what helps to minimize any potential issues.
Shipping contracts can also include other terms, such as delivery details, pricing, and so forth. However, when you’re dealing with large orders, especially international ones, determining the obligation and liability of who is responsible for any potential damages during shipping is very important.
As you negotiate deals with buyers, you need to make it clear what sort of shipping liability obligations your business is willing and able to support. For example, if you prefer to hand off responsibility before transit, that needs to be made known while you’re negotiating shipping agreements with your customer.
Luckily, standard shipping agreements are spelled out in the International Chamber of Commerce’s Incoterms documentation. Let’s take a look at the two most popular shipping agreements, CIF and FOB, to give you a better idea of how these work.
What is CIF?
Cost, Insurance, and Freight, or CIF for short, is a shipping agreement in which the seller takes responsibility for the costs and risks associated with the shipment. With a CIF agreement, the seller remains responsible for the shipment until it reaches the port of destination.
“Past the ship’s rails” and into the port of destination is usually considered the official point where the seller’s responsibility ends and is transferred to the buyer with a CIF agreement.
Some of the seller’s responsibilities with a CIF contract include freight charges, cargo insurance, and any additional fees. Since these expenses add up, buyers often factor them into the cost of the goods, which can make things more expensive for all parties involved.
It is important to note that, with CIF, buyers are responsible for further shipping costs that are associated with delivering the items from the port of destination to the buyer’s warehouse.
The vendor has more control and responsibility when using CIF. This is a bit of a double-edged sword. Having the responsibility shifted to the seller takes the weight off of the buyer’s shoulders. However, since the seller has more control, buyers are at the mercy of the seller. The buyer is unable to make cost-effective decisions, so they can expect to pay more for the goods and shipping service.
Pros and cons of CIF
Choosing CIF as a shipping agreement has pros and cons for both buyers and sellers. Let’s take a moment to weigh the advantages and disadvantages of CIF.
- The seller has more control
- Buyer has less responsibility
- A more seamless experience for the buyer
- Less stressful for buyers
- Can give sellers a leg up over competitors (due to the convenience to buyers)
- More responsibility on the seller
- Buyers have less control over the cost of delivery
- Additional costs for sellers might make the cost of goods higher
- Can be more costly for all parties involved
- Sellers take on more responsibility
What is FOB?
Free on Board, or FOB for short, is a shipping agreement that puts the responsibility on the buyer from the moment the shipment leaves the port of origin. The buyer is responsible for choosing and paying for a freight company, insuring the cargo, and other related costs.
With a FOB shipping agreement, the responsibility transfers from seller to buyer once the products are loaded and “past the ship’s rails” at the point of origin.
The most notable aspect of FOB is that it can be much more cost-effective than CIF and other shipping agreements. The reason for this is that buyers can negotiate their own rates. They also have the power to cut corners if they so desire, such as forgoing some insurances or protections.
Sellers, on the other hand, are typically less willing to take those risks since they might compromise the quality of their customers’ experience.
Pros and cons of FOB
FOB also comes with a slew of benefits and drawbacks. Let’s compare these pros and cons.
- Buyer has more control
- Buyers can make cost-effective decisions if possible
- Fewer costs for the seller
- Less responsibility for the seller
- Buyer has more responsibilities
- Less seamless for buyers than CIF
- Buyer has more expenses to take on
The key differences between CIF and FOB
The main difference between CIF and FOB is the party that is responsible for the goods while they are in transit. With a CIF agreement, the seller is liable for the goods during transit, and with a FOB, the buyer is liable for the goods during transit. Other than that, there is not a major difference between the two.
Generally, FOB is considered a more cost-effective approach. This is because buyers can make more cost-effective decisions about the shipment, such as buying the minimum insurance policy or going with a lower-cost freight company, since they are in control.
When sellers use CIF and claim liability, they are less likely to cut corners since they are dealing with another party’s goods, which can lead to larger expenses.
CIF vs. FOB: Which one should you choose?
Both CIF and FOB come with unique benefits. The one you choose for your specific trade needs depends on your specific circumstances. Neither option is inherently better than the other, since they both have unique pros and cons.
As a seller, a FOB agreement lets you off the hook as soon as the items leave the port of origin. This arrangement will cost you less money, and it will cost your buyer a bit more. It also takes a lot of your plate because it means your job will be done a lot sooner than the alternative.
However, to build long relationships with buyers, customer service is key. While a CIF agreement is more costly and time-consuming, it makes the process much more seamless for your buyer.
From the buyers’ perspective, CIF is the better option in situations where a “done for you” approach is desired. Of course, opting for a CIF trade agreement also requires a bit of flexibility with the budget.
Buyers that are on a tighter budget and want more control over the situation may opt to buy with CIF.
At the end of the day, it is up to you to decide which shipping obligation makes the most sense for you and your customers.
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