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FOB & CIF Basis

FOB (free on board) and CIF (cost, insurance, freight) are two common shipping terms that determine when ownership and liability transfer between buyers and sellers during international shipments. Under FOB, the buyer assumes responsibility for goods when they leave the seller's point of origin, while CIF keeps the seller responsible until goods reach the buyer's destination. FOB is usually cheaper for buyers as they avoid fees charged by sellers under CIF, but CIF provides more convenience as it keeps liability with the seller during transit. The appropriate choice depends on factors like import experience, shipment size, and whether priority is given to cost or convenience.

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Srikrishna Dhar
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135 views

FOB & CIF Basis

FOB (free on board) and CIF (cost, insurance, freight) are two common shipping terms that determine when ownership and liability transfer between buyers and sellers during international shipments. Under FOB, the buyer assumes responsibility for goods when they leave the seller's point of origin, while CIF keeps the seller responsible until goods reach the buyer's destination. FOB is usually cheaper for buyers as they avoid fees charged by sellers under CIF, but CIF provides more convenience as it keeps liability with the seller during transit. The appropriate choice depends on factors like import experience, shipment size, and whether priority is given to cost or convenience.

Uploaded by

Srikrishna Dhar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What Is FOB?

FOB refers to “free on board” or “freight on board.” FOB terms have two
parts: Origin or Destination and Collect or Prepaid.

FOB Origin means that the buyer assumes the title of the goods at the
point of origin. The moment that the shipper loads the goods onto the
freight carrier, the buyer is responsible for the goods. FOB Destination
means that the buyer assumes the title of goods at the point of
destination, meaning the shipper owns the goods while in transit. FOB
Origin is a much more common form of FOB, where buyers take all
responsibility for the goods the moment they leave the seller’s hands.

Freight Collect means that the buyer is responsible for the freight charges;
this is more often the case. Freight Prepaid means the seller has paid for
the charges.

Most often, FOB refers to FOB Origin, Freight Collect. This means that the
buyer assumes ownership and responsibility for the goods once they
leave their originating point. In this case, the FOB process is as follows:

• The seller loads the good on the freight vessel of the buyer’s nomination.
• The seller clears goods for export in their country.
• The freight hauler picks up and signs for the package, at which point the
title of goods transfers to the buyer.
• The buyer is then responsible for insurance costs and risks associated
with freight transport for the duration of transit.

Why Use FOB?


FOB is usually the most cost-effective option for buyers. Buyers don’t
have to pay a high fee to their sellers as they might with CIF. Buyers also
have more control over the freight timing and cost, because they are able
to choose their freight forwarder. If anything happens to the goods, they
hold the title and responsibility, so they can better access information and
solve concerns.

Sellers also like FOB because they don’t have responsibility for the goods.
Once the products leave their warehouse, sellers can mark the sale as
“complete” and not worry about any additional costs or problems.

Why Not Use FOB?


New importers are not recommended to use FOB because buyers must
retain more liability for the goods while in shipment. New buyers who
don’t yet understand the intricacies of overseas shipments can make
mistakes that can have severe penalties. New buyers might choose a CIF
contract until they better understand the importation process.

What Is CIF?
CIF or “cost insurance and freight” often holds primary ownership with the
seller until delivery. This means that the seller is responsible for risk and
insurance costs until the goods reach their point of destination with the
buyer. Ownership and liability transfers from the seller to the buyer the
moment the goods pass the boat’s railing at their port of destination.

In this way, sellers are responsible for everything involved with shipping.
They must provide the necessary customs documents for both countries,
pay for insurance cost, and are liable for the safe delivery of the goods.

Why Use CIF?


If you are a buyer, you may choose to use CIF because of
the convenience. You don’t have to handle any risks, claims, or freight
concerns in transit. This is especially important for new importers who
aren’t sure of the intricacies of shipping overseas. Many importers will
also use CIF if they are shipping a small batch of cargo, as the cost of
insurance for small volumes may actually be higher than the fees charged
by sellers.

Sellers may prefer to ship CIF because they can generate higher margins.
Nevertheless, ownership of the goods in transit places additional risk on
sellers.

Why Not Use CIF?


CIF tends to be a more expensive agreement than FOB for buyers. Often,
sellers will invoice buyers for their costs of shipping and insurance. They
may even add in additional fees to make a larger profit. In this way, buyers
end up paying more for shipping than they would with an FOB agreement.
Basically, buyers are paying a premium for convenience.

Moreover, buyers are relinquishing control over their shipment. If


something goes wrong with a CIF shipment, buyers have a much harder
time obtaining accurate shipping information because they don’t
technically own the goods. Furthermore, buyers have to rely on the seller
to provide the Importer Security Filing document; if buyers file this late,
there are serious fines and penalties. This reliance on the seller can put
buyers in a vulnerable position.

Insurance can also be interesting to navigate with CIF. Most often, the


seller is the beneficiary of the insurance, because they own the insurance
policy and the goods while in transit. This means that if something
happens to the goods during shipment, the seller receives the payout.
Likely, the buyer has already made some form of payment to the seller for
those goods. In this way, the seller then has to reproduce the goods for
the buyer or reimburse the buyer with their insurance money. This can
often create legal and communication concerns.
The Bottom-line
The major difference between FOB and CIF is when liability and ownership
transfers. In most cases of FOB, liability and title possession shifts when
the shipment leaves the point of origin. With CIF, responsibility transfers
to the buyer when the goods reach the point of destination.

In most cases, we recommend FOB for buyers and CIF for sellers. FOB
saves buyers money and provides control, but CIF helps sellers have a
higher profit. However, we recommend that new buyers use CIF as they
get accustomed to the importing process.

Not sure which type of ownership agreement will work best for
you? Contact LTX Solutions today to discuss your import freight situation.

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