Goods moving internationally must belong to someone – but who specifically? And if there’s a problem, who takes responsibility? The answers can be found in the logistics of FOB vs CIF.
At some point imported products moving across national borders switch from being the seller’s property to the buyer’s property. But exactly where and when is ownership transferred? And who’s liable for the risks and costs while the products are in transit?
Since international shipping agreements have been used for literally thousands of years, the resulting modernized contracts between buyer and seller help answer these questions in a legally binding way.
At any given point along the transport route, the International Commerce Terms (Incoterms) of CIF and FOB determines exactly who is responsible for the liability of the goods.
When it comes to the logistics of FOB vs CIF, which is best for your business? Let’s find out.
FOB vs CIF Shipping Terms Explained
What Is FOB Shipping?
FOB refers to “freight on board” or “free on board”. FOB terms come in two parts: Collect or Prepaid, and Origin or Destination.
FOB Origin means the buyer assumes title of the goods at the point of origin. In other words, the buyer is responsible for the goods at the moment the shipper loads the goods onto the freight carrier.
FOB Destination means the buyer assumes title of goods at the point of destination. Again in other words, the shipper owns the goods while they are in transit.
In practice, FOB Origin is the more common form of FOB – buyers assume all responsibility for the goods the moment they leave the seller’s hands.
Freight Collect means the buyer is responsible for freight charges; which is more often the case.
Freight Prepaid means the seller has paid the charges in advance.
In everyday terms, FOB will usually refer to FOB Origin, Freight Collect: the buyer assumes ownership and responsibility for the shipment once it leaves the originating point.
Thus, the typical FOB process works like this:
- The seller loads the freight on the vessel of the buyer’s nomination.
- The seller clears the freight for export from their country.
- The freight hauler then picks up and signs for the shipment, at which point the title of goods transfers to the buyer.
- The buyer is now responsible for any risks and insurance costs associated with the transportation of the freight for the duration of transit.
Why Use FOB?
For buyers, FOB is typically the most cost-effective option in that buyers don’t have to pay a high fee to sellers as they might with CIF – explained shortly.
The key element being the ability to choose their freight forwarder which allows them more control over the freight costs and timing. If anything were to happen to the shipment, they hold title and responsibility allowing better access to information that solve problems.
Sellers also benefit from FOB in that they don’t have responsibility for the goods. Once the shipment leaves their warehouse, sellers can then enter the sale as “completed” and not have worry about additional costs or problems.
When Not to Use FOB
As a new importer, it’s not recommended to use FOB. Keep in mind buyers must retain more liability for the goods while in transit.
Without experience and a full understanding of the intricacies of overseas shipments, new buyers can make costly mistakes that can result in severe penalties.
Alternatively, a CIF contract may be a better choice until a new buyer gains experience and better understands importation processes.
What Is CIF Shipping?
CIF, known as “cost insurance and freight”, is used by sellers to maintain primary ownership until delivery at the destination port.
In other words, the seller assumes responsibility for the shipment and covers the cost of insurance until it reaches its point of destination with the buyer.
At the moment the goods pass the boat’s railing at buyer’s port of destination, ownership and liability transfer from the seller to the buyer.
This way, sellers are responsible for everything involved with shipping once it leaves their home port. They must provide the necessary customs documents for both countries, including paying insurance costs, and assume liability for the safe delivery of the shipment.
Why use CIF?
As a buyer, the main reason to choose CIF would be for convenience. Because the seller is taking on the responsibility, you don’t have to deal with any claims, risks, or concerns while the freight is in transit.
As a buyer unfamiliar with the intricacies of shipping overseas, this is especially important for when acting as an importer. Many importers will also use CIF when shipping small batches of cargo. The cost of insurance for these smaller volumes can be higher than CIF fees charged by sellers.
As a seller, providing the service of shipping CIF can generate higher margins, but at the risk of maintaining ownership and responsibility of the goods while in transit.
When Not to Use CIF
Compared to FOB, CIF comes at a higher cost for buyers: sellers invoice buyers to cover costs of shipping and insurance.
As mentioned, sellers can add additional fees for the service to make a larger profit. Therefor using CIF provided by the seller ends up costing more for the buyer.
In a nutshell, buyers are paying a premium for convenience. Not only that, buyers also give up control over their shipment. If there’s a problem with a CIF shipment, a buyer will have a much harder time getting the right shipping information because technically, they don’t own the goods.
Moreover, buyers must rely on the seller to provide accurate Importer Security Filing document (ISF). If buyers file this late, there are serious penalties and fines. Hence, this reliance leaves buyers in a vulnerable position.
Finally there’s the issue of insurance. With CIF, sellers own the insurance policy covering the freight while in transit. Therefor the seller is the beneficiary of a payout should there be a claim.
Because the buyer has usually made some form of financial commitment, this can result in massive delays and communication issues while the problems of compensation and replacement are worked out.
FOB and CIF Ownership Agreements in Summary
In a nutshell, the major difference between FOB and CIF is in transference of liability and ownership.
With FOB, title possession and liability usually shift when the shipment leaves the point of origin.
With CIF, responsibility moves to the buyer once the goods reach the point of destination.
Simply put, on the whole it’s recommended that buyers use FOB, and sellers use CIF.
FOB provides greater control and saves buyers money, but CIF helps sellers maintain a higher profit. The caveat being that new buyers would be better advised to use CIF until they get accustomed to the import process.
Whether you’re moving products across town or across the world, contact Brimich to help make the right decisions.