When navigating the uncharted waters of international shipping as a beginner, the “incoterms” (terms describing international contracts) can be confusing and overwhelming. As a US buyer shipping goods from Japan, for example, you might be wondering what international shipping methods are best for you and your business, and with so many available options, no wonder it’s a difficult choice. This guide will explain the definitions as well as pros and cons of a few of your options for shipping goods from abroad, hopefully making the choice a little more clear.
Before you get started, a word.
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Now, back to what you came here to read.
FOB and CIF both describe overseas shipping agreements that specify whether the buyer or the seller is responsible for the goods while they are in transit¹.
FOB, or “Free On Board,” describes an agreement in which the seller is responsible for the goods until they arrive at the seller’s nearest port and are sent, or “past the ship’s rail.” Once they’re loaded and in transit, the buyer assumes all responsibility¹.
CIF, or “Cost, Insurance and Freight,” puts a lot more responsibility on the seller, who is responsible for paying the freight charges and insurance on the goods, and is responsible for them until they reach the buyer’s nearest port².
When shipping FOB, the seller covers the cost of getting the goods to the port nearest them, and then you have to take over. This may sound more expensive, but in reality, it gives you more control over the final price, since you get to choose the shipping companies, the route, the transit time and other factors that may affect the price.
On the other hand, when shipping CIF, the sellers or suppliers get to determine all of those things, though they also assume the cost of shipping and insurance, which are included in the purchase price of the goods under a CIF agreement³.
A hidden cost when you buy internationally: Exchange rates
When you buy internationally and two currencies are involved, there can be hidden costs in the exchange rate used to convert the payment for the goods. If you make your payment via a bank, it’s possible that the exchange rate used to convert the payment will be marked up by 3-5%, which is basically a hidden fee you end up paying. Using an alternative money transfer service, like TransferWise, ensures your money is converted at the real mid-market rate, saving you money in the end.
When you buy CIF, there are pros and cons, like:
Buying CIF means the shipping details are handled for you. There’s a lot less headache, and the seller is responsible for the cost of shipping, rather than having to pay it yourself³.
You don’t have any control over the company used to ship your goods, or what route they use or how long it takes. If anything goes wrong, you may not have recourse. The shipping company is working for the seller, not you, and doesn’t have any obligation to you to make things right if there’s a problem³.
Buying FOB also has pros and cons, like:
As the buyer, you have full control over the shipping company, including the route it uses and the time it takes for the goods to arrive at your port. If anything goes wrong, you have a point of contact within the shipping company to get it fixed. Since you’re paying for the shipping, you have legal recourse to fix any errors³.
You, as the buyer, assume all costs for shipping, which is ultimately going to make your order more expensive³.
After reading this guide, you should have a better understanding of a few of your options for international freight shipping, as well as which method might be the best choice for you and your business. At the end of the day, you have to make the choice that makes the most sense for you, so hopefully this helps.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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