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FOB vs CIF: Understanding the Risk and Responsibility

Views: 35     Author: Site Editor     Publish Time: 2022-09-06      Origin: Site

For sellers, FOB and CIF have the same risk. When the goods cross the ship's rail, the risk is transferred to the buyer. So, as sellers, we cannot rely on so-called contracts or trade terms, what we need to do is to take into account all potential risks as much as possible and minimize the possibility of them happening.

  

Back to the topic, in the current international trade, CIF or FOB, which one is more risky? This is based on the actual situation. Therefore, there is no so-called standard answer to this question. It depends on who can think of different considerations in more situations.


WHAT IS INCOTERMS 2020


FOB Risk

1. In the case of post-payment, the freight forwarder is easy to collude with the buyer and place the order to the buyer without paying the final payment. 


2. If the customer finally refuses to pick up the goods, the FOB case is not under our control because of the freight forwarder appointed by the customer, whether it is a return or an exclusive sale, the operation will be very troublesome, and it is easy to generate high demurrage charges. 


3. In the FOB case, the local cost of the customer-appointed freight forwarder is often higher than in the CIF case with their own freight forwarder. 


4. In the case of CIF, if the production is not timely resulting in delivery to be delayed a few days, it is possible to apply for LATECOME to meet the delivery requirements of the letter of credit, but in the case of FOB, to get additional support from the freight forwarder to the seller, it is difficult. 


CIF Risk

1. the CIF process is more complicated, the more complicated it is, the more likely to make mistakes, the risk of a mistake will come. About this in fact, we can give a simple example: the buyer asked for delivery before January 15, because after the 15th due to GRI freight to rise sharply. In the FOB case, the freight forwarder appointed by the buyer to book the ship booking, the result can not be booked to push a water ship, the freight rate rose 500 U.S. dollars / container, then the responsibility is not in the seller. But if the CIF case, the responsibility will be properly heaped on the body of the seller. 


2. CIF should bear the responsibility of the goods to the port of destination and before the buyer picked up. Of course we know that this statement is theoretically wrong, even if the CIF goods once the port of shipment over the ship's side, the responsibility and risk will be passed to the buyer. But what about in practice? Oh. But of course, this also depends on different customers in different situations. And in the case of CIF, even if the loss, there are insurance companies involved, the most fear is to do CIF results in forgetting to buy insurance or to take a chance and do not buy insurance, I have a friend is to do CIF forget to buy insurance, the results are also so coincidentally the ship touched the reef, but also so coincidentally her container fell into the water, the results of the responsibility on the body of the seller.


FOB vs CIF


FOB vs CIF: Risk and Responsibility  


FOB Term

Definition: FOB is the capitalization of the first letter of the three words FREE ON BOARD.

Applicable modes of transportation: sea and inland water transportation.

Key points: The risk division point, delivery point, and expense division point are all on the ship's rail designated by the buyer at the port of shipment (in actual operation, it is loaded into the cabin).


Seller's Responsibility

A. Be responsible for delivering the goods conforming to the contract at the designated port of shipment to the ship designated by the buyer in the customary manner of the port within the date or time limit specified in the contract, and giving the buyer sufficient notice of shipment.

B. Be responsible for obtaining export license or other approval certificate (commodity inspection certificate, certificate of origin, etc.) and go through the procedures for exporting goods (customs declaration, export booking, etc.).

C. Bear all the costs and risks until the goods pass the ship's rail at the port of shipment (actually until the ship's hold).

D. Responsible for providing commercial invoices and the usual documents to prove that the goods have been delivered to the ship (onboard ocean bill of lading).


Buyer's Responsibility

A. Responsible for paying the price of the goods according to the contract.

B. Responsible for booking or chartering ships, paying freight (sea freight), and giving the seller sufficient notice of the name of the ship, the place of shipment and the required delivery time, (in actual business, the buyer informs the seller of its freight forwarder at the port of shipment, And ask the seller to book a ship with it, the sea freight is paid on delivery, paid by the buyer, usually the sea freight paid by the buyer is 10-20% cheaper than the seller's own booking).

C. Obtain an import license at your own risk and expense (the quota is also applied by the buyer to the domestic administrative agency in the importing country) or other approval certificates, and go through all customs procedures for the import of goods and, if necessary, transit transportation through another country.

D. To bear all the costs and risks after the goods have crossed the ship's rail at the port of shipment (actually after the hold of the port of shipment)

E. Receive the goods delivered by the seller according to the contract, and accept the documents consistent with the contract.


Points to note in actual business

A. The port of departure is indicated in the trade contract: the port of departure should be a sea port or a river port (Nantong, Chongqing, etc. are inland river ports)

B. In the trade, the seller is required to provide a clean on-board bill of lading, and the transfer point of risks and expenses is the cabin designated by the port of shipment.

C. The connection of cargo and cargo shall be clearly stipulated in the trade contract, who shall pay the extra costs such as empty space fee, demurrage fee and storage insurance.

D. Who shall bear the loading fee at the port of shipment, that is, who shall pay the THC fee, and the principle of international trade is that whoever pays the sea freight and who pays the THC fee.

E. When making trade contracts with American customers and other American customers, pay attention to the trade practice of "1941 Amendment to the Definition of American Foreign Trade" in the price determination terms or the internationally accepted INCOTERMS 1990/2000 practice. Because of the different interpretations of the two conventions of the same FOB term, the risks, costs, responsibilities and obligations of both parties are very different.

F. Negotiate with the customer to try to designate only the shipping company or shipping agency, and strive for the freight forwarder to be arranged by us, and the destination port freight forwarder should also be designated by our freight forwarder, which can greatly reduce trade risks.


CIF Term

Definition: CIF is composed of the first letter of the three words COST, INSURANCE, AND FREIGHT (…..NAMED PROT OF DESTINATION), which means that when the goods cross the ship's rail at the port of shipment (actually in the shipping hold), the seller will Complete the delivery. The seller shall pay the freight and insurance premiums for the goods from the port of shipment to the port of destination, but the buyer shall bear the risk of damage and loss after the goods are shipped.

Applicable modes of transport: sea and inland water transport, trading country (sea port or river port where the goods finally arrive).

Key points: The risk point and delivery point are on the ship at the port of departure, and the cost division point is on the ship at the port of destination.


Seller's Responsibility

A. Within the time limit stipulated in the contract, deliver the goods conforming to the contract at the port of shipment to the ship destined for the designated port of destination, and give the buyer a loading notice.

B. Responsible for handling the export procedures of goods and obtaining export licenses or other approval certificates (origin, commodity inspection certificates, etc.)

C. Responsible for chartering or booking space and paying the sea freight to the port of destination.

D. Responsible for handling cargo transportation insurance and paying insurance premiums.

E. Responsible for all costs and risks until the goods pass the ship's rail at the port of shipment.

F. Responsible for providing commercial invoices, insurance policies and on-board bills of lading, etc.


Buyer's Responsibility

A. Pay the price as stipulated in the contract.

B. Responsible for handling import procedures to obtain import license or other approval.

C. Bear all costs and risks after the goods have passed the ship's rail at the port of shipment.

D. Receive the goods delivered by the seller in accordance with the contract, and accept the documents consistent with the contract.


Points to note in actual business

A. Conceptual misunderstanding: CIF and FOB, the delivery point and risk point in the terms are both on the ship at the port of shipment. The seller completes the seller's obligations when the goods are safely loaded on the ship at the port of shipment. The risk of the goods after shipment , the seller is no longer liable. The seller will hand over the insurance policy, bill of lading, etc. to the buyer, and the risk claim will be handled by the buyer.

B. Booking and stowage: under CIF conditions, the seller will book the ship independently, choose the shipping company freight forwarder, pay the freight, terminal fees, etc. Generally, the freight forwarder/shipping company designated by the buyer is not accepted. In actual business, customers will choose foreign services. Maersk, APL and other well-known shipping companies usually confirm the freight with the buyer, and it is acceptable after the shipping date, but generally it cannot be shipped by the freight forwarder designated by the buyer.

C. The seller handles insurance at the port of shipment. Generally, when concluding the contract, the insurance amount, the type of insurance and applicable insurance clauses, as well as the starting and ending period of the insurance liability are specified, and the insurance policy is selected by the association or China. The insurance policy must be endorsed and transferred when the bank presents the document. to the buyer.

D. Unloading costs: terminal operation fees, etc. CIF generally uses the PORT TO PORT clause, the cost of the port of departure shall be borne by the seller, and the cost of the port of destination shall be borne by the buyer.

E. Shipping notice, transit of goods, arrival date, etc.

1. After the seller loads the goods at the port of shipment, the seller obtains the ocean bill of lading and delivers the main shipping documents to the bank or to the buyer by himself. Underwriting insurance obtains the insurance policy and pays the ocean freight and miscellaneous charges at the port of shipment to complete all delivery obligations.

2. The seller shall give the buyer sufficient notice of shipment after shipment.

3. The seller has no responsibility for guaranteeing that the goods will arrive at the destination port and when they will arrive at the destination port.

4. The seller is not responsible for the damage, dampness, loss, etc. after the goods are shipped.

5. If the goods have been damaged or lost when the seller submits the documents, the buyer still has to pay against the bill. The buyer can claim damages from the insurance company with the bill of lading from the shipping company/shipping agency and the insurance policy and cannot file a claim with the seller.

6. In actual business, it is unreasonable for the buyer to claim that the goods are in the transit port, fail to transit on time, drop the box, and the goods are delayed for two or three transits on the way to the port, which affects the delivery of garments/finished products. , how to avoid the obligation of the seller to guarantee when the goods will arrive at the destination port and the date when the transit cannot be guaranteed when the trade contract is concluded.


Give an example

On the one hand, the reason comes from the owner. The owner of ships the product to port of destination, and can even be responsible for import clearance, on behalf of the tax, and then directly shipped to the buyer's warehouse, over time, the buyer on the one hand, the reason comes from the seller, especially for some old-school factories, not to mention FOB, he simply hated all the terms are EX WORK, one hand delivery, the best is the buyer directly pulled the cabinet at the end of the production line where waiting, the goods once the line directly What trailer what barge what customs clearance what tax refund, all and he has nothing to do with a dime. 


In this premise, FOB has become the best balance point after the game, and over time, FOB has slowly become the stereotypical thinking of many Chinese suppliers. But is that really the case? I do not think so, in my opinion, this problem can be viewed from two perspectives. 


The first is from an operational perspective

Many companies encourage business with customers to do CIF, for the following simple reasons. 

1) Freight + insurance can be an additional source of profit. 

2) It can avoid local cost overruns. 

3) It can effectively control the right in rem, especially in the case of payment after shipment. 


But I think these are not the most important, the most important is that the greater the proportion of my customers in the procurement chain, the greater my core value, the higher the opportunity cost of customers to replace me. Imagine that I not only provide products to customers, I also help customers rely on me more and more, this time even if competitors jump out to tell customers that his FOB price is 5% lower than mine, how? Changing me means changing a lot of things for the customer. 


The second is from the ideological point of view

From the financial point of view, the shipment of money received is the close file, but for B2B sales staff, only the customer also sold the product is considered the end of the sales action, but this ideology, few people have. We often can only see the "goods over the side of the ship" before this end, dumbly just with "cost + expenses + profit" way to quote, naively think is not to postpone a big boat well what is the big deal, foolishly think that sweeping a small problem such as leakage of water number Do not need to tell customers in advance, not to mention what to understand the customer's channels and downline, and help customers to do marketing and promotion, Free On Board, the goods over the side of the ship, there is nothing to do with me.


You are right to think so, but your competitors do not think so. Their battlefield has long moved forward, they will always pay attention to the market and local exchange rate changes to help customers avoid risk, they will go with customers to investigate the market together with the design of products, together with the next line of customers to help do representation, they will set up overseas warehouses in the local in order to quickly delivery, and even set up a branch to help provide after-sales, they should do what they have done, they should not do what they did also did The only purpose is to help customers sell their products, and even replace them when necessary. 


MORE THAN FOB, BUT NOT JUST CIF.

1. Whether it is FOB, CIF or others, it is not a static existence, and we have to consider it in combination with practical issues such as payment methods.


2. FOB and CIF, the transfer of property rights is actually based on "delivery of documents" as a node, but CIF will make the control of property rights more solid because the seller has mastered the freight forwarding, especially in the case of payment after the goods.


3. Freight forwarding is a very important part of international trade. Whoever masters the freight forwarding will have more initiative, so in general, I actually prefer sellers to do CIF as much as possible. When I used to do sales, I would quote a CIF price for customers' reference before every shipment, and doing CIF may sometimes bring extra profit to the seller.


4. Same as above, as a buyer, there is more inclination to do FOB. In addition to the consideration of mastering the initiative, it is more that overseas freight forwarders basically provide one-stop service from shipping to import, from communication to operation. Provide more convenience.

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