What is CIF & FOB?
CIF refers to Cost Insurance and Freight while FOB refers to Free On Board. These are Incoterms® that define how risks, obligations and costs associated with cross border transport are allocated between buyer and seller. For a detailed explanation of what these terms mean you can refer to some of our other articles which have more information on both CIF and FOB.
CIF and FOB are both marine only terms and can only be used when freight is by ocean or waterway.
It is often said that traders should buy on FOB terms and sell on CIF terms. Let’s explore whether this statement is indeed true.
Advantageous & Disadvantages of FOB
Under FOB terms, risk is transferred to the buyer once the cargo is loaded on board the vessel. The buyer has to pay for freight to the destination. The seller must clear the goods for export, but not for import.
Advantageous & Disadvantages of CIF
Under CIF terms risks are transferred to the buyer upon good being loaded onto the vessel. However, it must be remembered that the seller still has to pay for freight to the named port (destination). Here too, the seller must clear the goods for export, but not for import.
Under CIF terms, the seller must buy insurance for the cargo to the buyer’s benefit.
Reasons for buyers to use CIF?
Buying on CIF terms is reasonable for new traders or traders dealing with small volumes of cargo. Under CIF terms, buyers do not have to trouble themselves with freight and other logistics matters, since the seller is responsible for making these arrangements. This makes this very convenient for the buyer, however at a higher price. This is because the supplier will likely choose to work with transportation vendors that he/she is familiar with and at the same time not be too pressured to suppress transportation costs, since these will be included in the price anyway.
Using CIF terms for large volumes becomes difficult, as increases shipment volume means there is a greater chance that shipments will get stopped by Customs for various reasons. When shipments get stopped by Customs even at import, freight forwarders typically reach out to the party that contracted them for carriage, which in this case would be the shipper or seller who is based overseas. The distance, time differences and unfamiliarity with the environment can result in delays responding to Customs which in turn can result in abandoned cargo, fines, penalties or demurrages.
Reasons for buyers to use FOB?
Using the FOB term creates some benefits for the buyer to save on costs. Since the buyer is responsible for arranging transport, the buyer can shop around for the best rates and control freight costs directly. Moreover, the buyer will be the contracting party with the main freight forwarder and hence be in the best possible position to provide support in the event of a challenge or issue raised by authorities. The buyer can also choose not to purchases insurance if not necessary.
FOB should ideally be used by buyers who are familiar with the processes related to international trade.