What Is the Difference Between CIF and FOB?

CIF and FOB are two incoterms you need to know if you run a business or dabble in shipping. Even if you don't, knowing these international commercial terms can help you understand what exactly goes into your shipment costs. And, of course, these terms have vastly different definitions.

It's easy to mistake Cost, Insurance, and Freight with Cost and Freight. Free On Board is different from Free Carrier or Free Alongside Ship. These 11 terms are international shipping agreements that the ICC has established. The terms have been used in international commerce since 1936 and are updated periodically.

Learn more about CIF, FOB, and their differences to get the best out of your shipping arrangements.

What Does CIF Mean?

CIF stands for Cost, Insurance, and Freight. As the name suggests, the seller is responsible for the shipping cost and cargo insurance. The seller is also responsible for obtaining all the required documents to export the goods. Cost, Insurance is an exclusive incoterm used for ocean freight, usually used for oversized deliveries.

The buyer becomes fully responsible when the goods arrive at the destination port. The buyer pays related fees like customs, import duty, and taxes. They're also in charge of unloading and handling the goods at the destination. Any documents the transport carrier holds are handed over to the buyer to clear the goods after payment.

The seller's responsibilities under this agreement are:

• Product delivery to marine transit
• Paperwork
• Packaging
• Any conveyance from warehouse to port in the country of origin
• Customs fee, export duty, taxes in origin country
• Terminal handling in the origin country
• Main carriage for international shipping
• Cargo insurance

Meanwhile, the buyers are responsible for:

• Customs fees, import duties, and taxes in the destination country
• Handling fees and any additional costs in the destination country
• Transportation from destination port to final address

Insurance's Role

The role of insurance is highly vital in Cost, Insurance. It's the point that separates cost, insurance, and freight arrangements from a similar arrangement, CFR (Cost and freight). These two arrangements are identical, except for the insurance costs. Under CIF, the seller is contractually required to pay for insurance coverage for the cargo.

In reality, many customers usually prefer CFR because, under CFR, the buyer takes care of the insurance costs. The buyer can obtain higher insurance coverage than the seller offers under CFR.

Is Cost, Insurance Better Than Free On Board?

Using a Cost, Insurance incoterm for your shipping arrangement is better for these situations:

• Buyers should use a Cost, Insurance arrangement when dealing with international sellers. International sellers may have more direct access to vessels, whereas buyers may only have limited access.
• Using a Cost, Insurance arrangement is good if a buyer is not particularly experienced in international shipping. Cost, Insurance doesn't require the buyer to have expertise in logistics and shipping, so the buyer is concerned only with taking over the goods once they arrive.

However, CIF is usually more costly than FOB. Depending on the products shipped, using a FOB arrangement may be more advantageous.

How Do You Define FOB?

FOB, short for Free On Board, is an invoice that gives the buyer plenty of flexibility and control over the shipment. Under this agreement, the seller only controls the goods until they are loaded onto a ship at the origin. This means the seller only pays for the goods to be moved and loaded onto the vessel.

After that, the products belong to the buyer. The buyer assumes complete liability as soon as the journey begins. This includes transport, insurance, and all additional charges. Then, at the destination, the buyer is again responsible for handling and clearing the goods.

The seller's responsibilities under Free On Board are:

• Product delivery to sea conveyance
• Paperwork
• Packaging
• Customs fee, export duty, taxes in origin country
• Terminal handling in the origin country

Meanwhile, under Free On Board, the buyer is responsible for:

• Main carriage for international shipping
• Customs fees, import duties, and taxes in the destination country
• Handling fees and any additional costs in the destination country
• Transportation from the port of destination to the final address

Variations In Free On-Board

There are four variations in FOB arrangements. Each differs in where the buyer takes control of the shipment and who is responsible for the costs. Take a deeper look at each variation.

Origin, Freight Prepaid

• The seller oversees the transporting of products to the port of origin
• The seller pays for the freight cost
• The buyer takes over the risk after the goods are loaded onto the ship
• The buyer takes care of any other conveyance costs and risks

Origin, Freight Collect

• The seller oversees the moving of products to the shipment port (origin)
• But it's the buyer who pays for the freight cost.
• The buyer also takes over the risk from the seller when the goods are on board the ship.

Destination, Freight Prepaid

• The seller is in charge of hauling the products to the destination port.
• The seller pays for the freight cost.
• The buyer is accountable for the risk when the goods arrive at the destination port.
• The buyer is responsible for all further shifting fees and risks from the destination port.

Destination, Freight Collect

• The seller is in charge of dispatching the products to the destination port.
• But it's the buyer who pays for the freight charge
• The buyer is accountable for the risk when the goods arrive at the port of destination

Which one is the most commonly used arrangement in international shipping? You would be right if you guessed it was FOB Origin, freight collect.

Under the FOB Origin, freight collects variation, and the seller's role is fulfilled once the products are on board the freight carrier. That's where the buyer assumes control over the costs and risks. The buyer will then be free to arrange the shipment as they desire, although all potential risks also fall under the buyer's responsibility.

Insurance's Role

FOB agreements do not require insurance from either party. However, getting the cargo insured is still common practice because insurance is usually required for international shipping. Both parties can negotiate to cover the insurance; one or both parties can provide the insurance.

Is Free On Board Better Than Cost, Insurance?

For the buyer, it can be a better idea to use Free On Board. It's the type of contract that allows buyers to negotiate a cheaper freight cost and insurance. Buyers can also choose a freight forwarder of their own. Some international traders even apply Free On Board for the goods they buy from other countries but will use CIF when selling to other countries. Combining these methods can maximize profits.

However, it's not recommended if the buyers have little experience or expertise with logistics and shipping. This is because:

• It requires more coordination and oversight from the buyer. The regulations can be complicated so that the process will consume more time.
• The buyer has to take on more responsibilities and risks of the goods. If loss or damage occurs, the buyer will have to bear the cost and deal with filing insurance claims.

Comparison

We compare the main differences between CIF and FOB to make it easier to understand.

Which One Should I Use?

Both arrangements have benefits and drawbacks. Your business model and goals will decide which can give you optimum benefits.

CIF gives the sellers more control and profits by setting the terms of the shipping process under the agreement. The buyer may also benefit from Cost, Insurance as they only have to wait for the products' arrival and collect them without any worries. But CIF is pricier, with a higher shipping cost and limited access on the buyer's side.

Meanwhile, It is much more advantageous for buyers as they have more liberty to arrange the shipment and deal directly with carriers and insurance providers. They have more control under this agreement. Shipping is also the more affordable option. However, inexperienced buyers without in-depth knowledge of international trade may flounder with this arrangement.

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