Customs

Difference Between CIF and FOB

Difference Between CIF and FOB

Some of the common differences between CIF and FOB are:

Meaning

FOB agreements are those agreements where the seller’s responsibility comes to an end once the goods are loaded on the vessel or transport that has been chosen by the buyer for shipment.

Meanwhile, according to the CIF agreement, the responsibility of the sellers may be extended till the time the goods are delivered to the specified port of goods destination.

Delivery

As per the FOB contract or an agreement, the responsibility of the buyer starts from the port of shipment, from arranging to paying the cost of transportation of goods.

In CIF, the responsibility of the seller is to arrange and pay the amount of goods transportation until the port of destination.

Costs of Transportation

When it comes to FOB, the buyer has to incur the cost of transportation, starting from the port of shipment, which includes the cost of both loading and unloading.

Under CIF, a seller is responsible for the cost of transportation until the respective destination of the port according to the contract price.

Insurance

According to the FOB, the insurance coverage of goods at the time of transportation has to be covered by the respective buyer.

Meanwhile, under CIF, the seller is responsible for incurring the cost of insurance coverage of the goods from the time of transportation until the time of the destination of the port.

Risk of Loss or Damage

When it comes to the risk of loss or damage to the goods, under FOB, the responsibility transfers from the seller to the buyer once the goods are loaded on the ship or vessel.

On the other hand, the responsibility for the risk of loss or damage of goods gets transferred from the seller to the buyer once the goods are delivered to the respective destination of the port under the CIF agreement.

Price

Under FOB, both buyer and seller have to pay the cost of goods and various local charges at the port at the price agreed upon.

Whereas, under the CIF, the price agreed upon between the seller and buyer includes the prices of the goods, such as insurance and freight charges until the destination of the port.

Import formalities

According to the FOB, various responsibilities of import formalities, such as customs clearance, duties, taxes, custom duty valuation, etc. are incurred by the buyer.

According to CIF, the import formalities may be accompanied by a seller with the buyer, which includes customs clearance, duties, taxes, etc.

Documentation

Under FOB, when it comes to transport documentation, it is the responsibility of the seller to provide documents like commercial invoices, lists of packing to the buyer, etc.

According to the CIF agreement, the seller’s responsibility towards the buyer is to provide additional documents like an insurance certificate and bill of lading.

Buyer’s Control

According to the agreement under the FOB, the buyer has more control or responsibility towards the shipment or transport as they are responsible for selecting the method of shipping and carrier

, as compared to the seller.

Meanwhile, in the CIF agreement, the responsibility of the buyer is less in comparison to the seller, especially over the shipment, as the seller is responsible for arranging the transportation of goods and insurance.

Seller’s Responsibility

In the FOB agreement, the seller’s responsibility includes delivering the goods or items to the destination of the port of shipment and ensuring that such goods are ready for export. Various custom duty services have to be incurred by the seller.

On the other hand, in an agreement under the CIF, the seller is responsible for delivering the items or goods to the destination of the port as per the agreement with the buyer and ensuring that such goods or items are ready to import.

Cost Allocation

The buyer under the FOB meets most of the expenses connected with various charges of transportation, such as freight cost, customs duties, etc.

According to the CIF agreement, the seller has to incur most of the expenses connected with transportation, such as freight charges and various other insurance premiums.

Export Clearance

Under the FOB agreement, all the necessary export licenses or various other permits have to be obtained by the buyer.

According to the CIF agreement, all the necessary export licenses or various other permits have to be obtained by the seller.

Import Clearance

According to the FOB agreement, all the necessary licenses on import or permits on the respective goods or items of the agreements have to be fulfilled by the buyer himself.

Meanwhile, under the CIF agreement, the seller may accompany the buyer in obtaining all the necessary licenses on import and other important permits.

Point of Delivery

The point of delivery under the FOB agreement is at the port of shipment of the goods.

Meanwhile, the point of delivery under the CIF agreement is at the port of destination of the respective goods and items.

Risk Allocation

According to the FOB agreement, the buyer has to take responsibility for the risk of loss and damage of the items or goods once they are loaded on the respective ship or vessels.

On the other hand, under the CIF agreement, the seller has to assume the responsibility for the risk of loss and damage of the goods or items till the point of delivery of such goods at the port of destination.

Freight charges

FOB agreement ensures that the buyer pays the cost of freight charges on the transportation of goods or items.

The CIF agreement ensures that the seller meets the cost of freight charges according to the agreement or contract charges.

Insurance Coverage

At the time of transportation of goods, the buyer has to meet the various insurance charges under the FOB agreement.

Meanwhile, according to the CIF agreement, it is the seller’s responsibility to arrange and incur various insurance coverages at the time of transportation until the goods reach the port of destination.

Delivery Time

The delivery time under the FOB agreement depends on the time of the buyer’s arrangement for transportation from the port of shipment.

The delivery time under the CIF agreement depends on the time of the sellers and arrangements for transportation to the port of destination.

Letter of Credit

A letter of credit may need to be provided by the buyer to a seller on satisfactory delivery of the goods to ensure payment.

A letter of credit may be requested by the seller to the buyer to ensure payment from the respective buyer.

Incoterms

FOB Incoterms agreements are those agreements that can be used in any mode of transportation

Meanwhile, CIF Incoterms agreements are those agreements that are specifically used for the maritime transportation of goods and items.

What is CIF?

CIF’s acronym is Cost Insurance and Freight. It is a shipping agreement that is used in the transportation of goods between the sellers and buyers. It is a kind of fee that a seller incurred costs, such as insurance on orders of a dealer’s freight route. CIF is one of the 11 common international commerce terms that was introduced by the ICC or International Chamber of Commerce in 1936. However, CIF is most commonly used for delivering large articles that are only carried through water, sea, or ocean.

Once the goods or article reaches the port destination according to the CIF agreement, the buyer holds the responsibility. A buyer may have to pay several charges and various other liabilities like customs fees; hence, accordingly, a transport carrier shall hand over the documents on the transfer of articles or goods to the buyer once the payment is completed.

In general, CIF is costly when buying goods because unnecessary charges on transport may be charged by the seller to the buyer to increase the amount of profit on the transaction. Often, buyers under this CIF agreement have to pay an extra additional fee at various ports, for example, docking fees and customs clearance fees, before the goods are cleared.

What are the features of CIF?

  1. The ICC or International Chamber of Commerce has introduced Cost Insurance and Freight (CIF) as an incoterm, which is comparable to various domestic terminology but at the same time has a global applicability.
  2. CIF is an agreement on the global shipping of articles and goods that is authorized to govern the product shipment between a manufacturer and a wholesaler and thus hand over the responsibility to the concerned authority at the time of transit of such items.
  3. CIF signifies the responsibility or duty of a seller on an item or an article passed on to the buyer.
  4. The CIF method of agreements is only applicable to inland rivers and ocean transport.
  5. The seller has to bear all the fees until the products or items are handed over to the buyer’s hand by paying the cost to the seller.
  6. The CIF agreement is equivalent to paying for transport and insurance.

What are the buyer’s Responsibilities during CIF?

  1. According to the CIF agreement, the responsibility of a buyer is to arrange the carriage of the items received from the seller to the place of destination.
  2. The buyer has to incur all the payments on clearance for the import customs under the CIF agreement.
  3. According to the CIF agreement, the buyer has to pay all the taxes and import duties.

When is CIF used?

CIF agreements are only eligible if the articles or products are transported by ocean or river. A customer who wants to avoid charges on insurance and freight and accept responsibility for foreign delivery may use the CIF agreements instead.

What is FOB?

FOB or Freight on Board, also commonly known as Free on Board, is an international commercial law published by the International Chamber of Commerce. This law or agreement signifies the cost and risks of goods shipped from the seller to the buyer.

According to the Free of Board, the seller’s responsibility is assumed until the goods or articles are loaded onto the shipping vessel. In this agreement, sellers usually pay for the costs that are to be transported to the concerned port and onto the vessel. This shows that under FOB, the seller’s responsibility is limited to a buyer under such an agreement.

A buyer under this FOB agreement takes control of the goods once the seller delivers and loads such goods onto the ship or vessels. In general, once the ship starts, the buyers’ liability is assumed, including various charges such as transport, insurance, and other additional fees and costs. However, the responsibility to unload the items or articles is upon the buyer.

FOB shipping contract agreement is cheaper and more flexible than a CIF agreement. Here, the buyer can negotiate a lower price on various services, such as freight and insurance, according to their choice, with the concerned forwarder.

What are the features of FOB?

Some of the key features of Free on Board are:

  1. According to the FOB agreement, both seller and buyer can decide the point at which the ownership of the goods transported shall be transferred to whom.
  2. This FOB agreement also decides accordingly who would be responsible for paying the cost of freight and various other costs of transportation.
  3. The responsibilities of buyers and sellers are decided very clearly during the shipping process under this FOB agreement. These responsibilities include deciding who would be responsible for loading goods onto the respective transport vehicle and which party would be responsible for incurring the cost of customs duties.
  4. FOB agreements are accepted standardized concepts commonly used during international trade serving various sales and shipment of goods or articles.
  5. FOB agreement is not limited to shipping of goods through ocean or sea but also air and land.
  6. The price of the goods through a FOB agreement may be affected since the transportation cost may either be inclusive or may be excluded, which the buyer later has to pay.

What is the responsibility of the seller and buyer under FOB?

According to the FOB agreement, sellers usually have to bear the cost till the point the goods or articles are loaded in a vessel or transported, and the buyer is nominated to carry the respective goods. The responsibility of the buyer starts from the point the goods are loaded into the vessel by the seller. Thus, the buyer’s responsibility includes paying the cost of marine freight transportation, landing bills, fees, insurance, unloading, and various other costs on transportation, starting from the arrival port to the destination of goods. Overall, as per the Free on-board agreement, the buyer has to bear all the costs and risks on goods on transport, covering both loss and damage from the point the seller loaded the articles in the vessel.

Conclusion

Thus, both CIF and FOB are the most common terms used in the shipping industry, defining the responsibilities of both sellers and buyers of goods or an article when goods are traded internationally. The primary difference between CIF and FOB is to identify the point of responsibility and risk transfer at the time of transaction from a seller to a buyer. However, in CIF the responsibilities are transferred at the destination of the port, and in FOB the said responsibility is transferred at the time when goods are loaded into the vessel at the port of shipment.

FAQs

  1. What is CIF and FOB in international trade?

    Both CIF and FOB terms are used in international trade or shipping referring to the costs that are to be incurred by the seller and the buyer while receiving and loading the respective articles or items during the time of transportation.

  2. What does FOB mean?

    FOB stands for freight on board, here the responsibility of a seller comes to an end once the seller loads the goods in the vessel or ship and thus the responsibility shifts from seller to buyer.

  3. What does CIF mean?

    CIF stands for Cost Insurance and Freight, here unlike the FOB seller responsibility continues until the goods reach their port destination. Therefore, the seller has to pay the cost of goods, insurance, and freight.

  4. What is the primary difference between CIF and FOB?

    The primary difference between CIF and FOB is the transportation costs and risk. Here in FOB, the seller is responsible for the cost of transport until the goods are loaded in the respective ship, whereas in CIF the seller has to incur the cost until the goods reach their port destination.

  5. Which party pays for insurance in CIF and FOB?

    Under CIF the seller of the goods is responsible for paying the insurance on the transportation, on the other hand, the buyer has to cover the cost of insurance once the goods are loaded onto the ship by the seller.

  6. How does the choice between CIF and FOB impact shipping costs?

    FOB or a free board is cheaper than a CIF or cost, insurance, and freight agreement because in FOB buyers have more control over the logistics in the shipping of goods such as insurance and costs of transport.

  7. Are there any risks associated with CIF and FOB?

    Yes, FOB transfers the buyer a risk at the point of loading onto the vessel, whereas CIF transfers the risk once the goods are loaded but also covered by insurance.

  8. Which term is more favorable for the buyer CIF or FOB?

    It depends on the preferences of the buyers and sellers on risk tolerance. Unlike CIF, FOB offers more control and potentially lower costs to the buyers, whereas CIF provides a comprehensive package such as insurance and minimizes buyers' responsibilities.

  9.  Can CIF and FOB be used for any mode of transportation?

    Both CIF and FOB are most commonly used on an agreement connected to the transportation of shipping goods through sea freight, however, they can also be adapted for other modes of transportation like air or land according to the terms and conditions of an agreement.

  10. How do CIF and FOB impact the overall cost of goods in international trade?

    Both CIF and FOB impact the cost and budget in international trade, thus understanding the terms and conditions of an agreement is indeed important for negotiating and optimizing the cost of international trade.

Trending Posted