CIF vs. FOB – How to make the right choice?
Goods shipped internationally must belong to someone – but who specifically? And who is responsible if something goes wrong? The answer can be found in the logistics of FOB vs CIF.
At some point, imported products shipped across borders change from the property of the seller to the property of the buyer. But when and where exactly does ownership pass? Who bears the risks and costs of the product in transit?
Since international shipping agreements have been in use for thousands of years, the resulting modern contracts between buyers and sellers help to answer these questions in a legally binding manner.
The Incoterms (CIF and FOB) determine exactly who is responsible for the goods at any given point along the shipping route.
When it comes to FOB vs. CIF logistics, which one is best for your business? Let’s find out.
What is the difference between CIF and FOB (CIF vs. FOB)?
As a wholesaler, shipping agreements play an essential role in your sales and distribution process. This determines who is responsible for the goods transported between the seller and the buyer. In import and export trade, there are many different options for shipping agreements. This is where cost, insurance, freight (CIF), and free on board (FOB) come into play.
CIF vs. FOB is one of the most commonly used international transport agreements in the International Business Terms (Incoterms) formulated by the International Chamber of Commerce (ICC).
In this article, we will discuss the difference between CIF and FOB. We will compare CIF vs. FOB agreements and discuss what to consider when choosing an international transport agreement.
What is a shipping agreement?
The transportation obligation determines that the buyer or seller is responsible for orders placed in transit between transportation and delivery.
This is especially important in the case of cross-border trade. This is because freight usually passes through international waters and is subject to different rules and regulations. Documenting everything according to who is responsible for what will help minimize any potential problems.
The contract of carriage may also include other terms, such as delivery details, pricing, etc. However, when dealing with large orders, especially international orders, it is very important to determine who is responsible for any potential damage during transportation.
When you negotiate with buyers, you need to be clear about what kind of transportation obligations your company is willing and able to support. For example, when negotiating shipping agreements, you must let the suppliers know if you tend to hand over responsibilities before shipping.
Fortunately, the standard transport agreement is detailed in the International Chamber of Commerce’s General Rules for the Interpretation of International Trade Terms. Let’s take a closer look at the two most popular transport protocols, CIF vs. FOB, to give you a better understanding of how they work.
What is CIF?
Cost, Insurance, and Freight, abbreviated as CIF, is a transportation agreement where the seller bears the costs and risks related to transportation. Under the CIF shipping point agreement, the seller is responsible for loading the ship until the goods arrive at the destination port.
Entering the port of destination “over the ship’s rail” is usually considered the official place where the seller’s liability ends and is transferred to the buyer in the CIF agreement.
For CIF contracts, the seller’s responsibilities include freight, cargo insurance, and any other costs. Because these costs are added together, buyers usually include them in the cost of goods, making things more expensive for all parties involved.
It should be noted that under CIF conditions, the buyer is responsible for the further transportation costs of the goods from the port of destination to the buyer’s warehouse.
When using CIF, the supplier has more control and responsibility. This is a double-edged sword. By transferring the responsibility to the seller, the burden on the buyer’s shoulders is reduced. However, since the seller has more control, the buyer is entirely at the seller’s disposal. Buyers cannot make cost-effective decisions so that they may pay more for goods and transportation services.
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 (FOB), abbreviated as FOB, is a shipping agreement that the buyer assumes responsibility for from the moment the goods leave the original port. The buyer is responsible for selecting and paying the freight company, cargo insurance, and other related expenses.
In the FOB shipping agreement, once the product is shipped and “over the ship’s rail” at the place of origin, the responsibility is transferred from the seller to the buyer.
The most notable thing about FOB is that it is more cost-effective than CIF and other transportation agreements. The reason is that buyers can negotiate their prices. If they want, they also have the right to take shortcuts, such as giving up some insurance or protective measures.
On the other hand, sellers are usually reluctant to take these risks because it may affect the quality of customer experience.
Pros and cons of FOB
FOB prices also have many advantages and disadvantages. Let us compare these advantages and disadvantages.
- 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 main difference between CIF and FOB (CIF vs. FOB)
The main difference between CIF and FOB lies in the responsible party of the goods in transit. If it is a CIF agreement, the seller is responsible for the goods in transit; if it is a FOB agreement, the buyer is responsible for the goods in transit. Other than that, there are no significant differences between CIF vs. FOB.
Generally speaking, FOB is considered a more cost-effective method. This is because buyers can make a more cost-effective decisions in transportation, such as buying minimum insurance or cooperating with lower-cost freight companies. After all, they are in control.
When sellers use CIF and demand compensation, they are less likely to cut corners because they deal with the other party’s goods, resulting in higher costs.
CIF Vs. FOB: Which one do you choose?
Both CIF and FOB shipping terms have unique benefits. Which trading method do you choose according to your specific situation. Either choice is not inherently better than the other because they all have unique advantages and disadvantages.
As a seller, the FOB agreement can get you out of trouble as long as the goods leave the port of origin. This arrangement will make you spend less but will make your buyers spend more. This will also not take up a lot of your time because it means your work will be completed faster than other options.
However, to build long-term relationships with buyers, customer service is the key. Although the CIF agreement takes more time, for your buyer, the process is more seamless.
From the buyer’s point of view, CIF is a better choice in situations where is “done it for you.” Of course, choosing a CIF trade agreement also requires some flexibility in the budget.
How to Determine What Incoterms to Use?
When it comes to shipping from China, customers often ask us what international trade term options should they choose. Our typical answer is, “Most buyers choose FOB, so this may be what you want.” But this is a bit short. Let us understand in more detail how to choose the right Alibaba trade terms option that meets your needs from the list of the 2020 International Trade Term Interpretation General Rules.
To have a deeper understanding of the general principles of interpretation of major Alibaba trade terms, we have prepared the following flow chart:
If you know exactly what you are doing, you can certainly define your own Alibaba trade incoterms. The General Principles of Interpretation of International Trade Terms in 2020 are just terms “pre-packaged” to simplify people’s lives, but in fact there are countless variants of them.
Note: You do not need to be strictly restricted by any international trade term.
Please remember that the general rules for interpreting Alibaba trade terms listed on this page are all pre-packaged transport terms. They are advisory and not mandatory. If you are buying a large number of goods, these terms should not limit your creativity.
Below is an example. Customers want to receive the goods in their own warehouses and let the seller pay import duties, but the customers want to control the transportation (because they know they are more efficient than the supplier in terms of transportation). So they want DDU, which should be similar to FOB except for transportation.
It is not complicated to write these into the contract. professional logistics agent can help you see the opportunities and ensure that your contract contains all the essential terms.
If you buy in small quantities from Chinese or Indian suppliers, they may not accept customized shipping conditions. But if you represent a certain size of your business, they will usually listen to you and show a certain degree of flexibility.
My point is to avoid thinking, “So, which international trade term should I choose?” without looking at alternatives.
At the end of the day, it is up to you to decide CIF vs. FOB which shipping obligation makes the most sense for you and your customers. If you need help to import from China, check to see how our services can help you.