I know if you’re importing from China or other global countries, you’ve come across CIF shipping.
If this is the first time you import from China and not know what is CIF, then this is the righ guide for you.
Because I will guide you on every details of CIF shipping from China.
PS: If you’re looking for a reliable freight forwarder to help your shipping from China, Bansar can be your better choice, we’ll handle everything for your next shipment.
What is the difference between FOB and CIF?
CIF called COST INSURANCE AND FREIGHT , that mean seller must pay the costs and freight includes insurance to bring the goods to the port of destination.
FOB called FREE ON BOARD, that mean the buyer is at risk and takes ownership of goods once the seller ships the goods.
The major difference between CIF and FOB is the transportation costs and insurance during it.
How is CIF value calculated?
CIF PRICE means : the good of cost, freight and insurance cost are to be added together.
What is the difference of CIF and CFR?
Like CIF, in Cost and Freight (CFR), the seller is obligated to pay the freight and costs needed for the transportation of goods to the listed port of destination.
Risk obligation for damaged or lost goods and any extra costs is transferred to the buyer.
Of course, this is the moment the goods get onboard the ship at the port of origin.
Just like CIF, CFR compels the seller to do the customs clearance for the goods to be exported.
The main difference between the two arrangements is that, in CFR, the seller is not legally obligated to pay for the shipment’s insurance coverage while on transit.
Why Use CIF?
Buyers may consider buying CIF due to the convenience it comes with.
The incoterm saves you the stress of handling any claims, risk or any issues as far as the freight in transit is concerned.
The term is especially fit for new buyers who are not sure of the complexity of importing goods.
Furthermore, CIF is favourable to importers who are shipping a small quantity of goods.
It is because insurance cost for small quantities may in a real sense be comparatively higher than the amount charged by the sellers.
Sellers may opt for CIF since the arrangement can help them realize higher profit margins.
However, the fact that the goods in transit are still under their ownership places the extra risk on them.
What is CIF?
When dealing with suppliers in the international market, China included, you will be offered Cost, Insurance and Freight (CIF) as one of the terms of pricing.
Cost, Insurance and Freight is among the 13 international commerce terms popularly referred to as Incoterms.
CIF among other Incoterms was developed by the International Chamber of Commerce.
To regulate the shipping rules and responsibilities of sellers and buyers involved in international trade.
So, what is CIF as an international commerce term?
With CIF, the seller is responsible for the shipment’s costs, insurance and freight up to the buyer’s port of destination.
In this case, the price includes insurance and sea freight costs to transport the goods to your nearest port.
However, it covers your shipment up to your port of destination only – from there onwards, you assume the responsibility of the cargo.
Why Buy Based on CIF Incoterm?
If you are new to importing business or have a small amount of cargo, then, buying based on CIF is probably your best option.
This incoterm is the most convenient shipping term for you.
You do not have to personally go through the tedious freight and shipping process.
Nonetheless, you should be aware that you will pay more than you should be paying for the goods.
With this term, your supplier bears the responsibility of arranging for the insurance and freight paperwork.
This comes in handy if you are a new importer since you transfer all the freight handling details to the supplier – you simply let the seller deliver the goods to you.
The best part:
This shipment arrangement is an easy way of transporting your cargo from the port of origin to your port of destination.
Of course, without going through many details though, it comes with an added cost.
The supplier will often liaise with their own freight forwarder and increase the cost provided by the freight forwarder as an extra way of increasing his or her profit margin.
However, CIF terms may work to your disadvantage when you begin buying in bulk.
With an increase in CIF shipments, more problems might arise since getting accurate shipment detail gets more difficult.
Your overseas supplier might not act in time when problems come up while your shipment is in transit.
Normally, the seller ceases responsibility the moment the cargo reaches your destination port.
Any rising issue afterwards might cost you extra in per diem, demurrage or unexpected costs relating to shipping.
As an importer, you have to depend on your supplier and the freight forwarder they have contracted.
This makes communication and information flow quite difficult yet even one day delay may be very costly to you as a buyer.
Please take note of this:
It is also important to note that you might find yourself being taxed on the freight and insurance fees yet, these charges are not dutiable.
This is because it can be a hassle separating the charges from the actual invoice amount.
The Sellers’ Obligations
As a seller, here are some of your obligations under CIF terms to:
- Provide the commercial invoice and goods in compliance with the sale contracts.
- The purchase, cost of all licenses and official authorizations related to export, also the contracts and fees of the insurance coverage and transportation of goods.
- Deliver goods within the set timeframe to the buyer’s port of destination
- Bear the associated risk of damage or loss of goods until they are delivered to the buyer’s port.
- Separate customs, freight and related costs.
- Give the buyer adequate notice and proof of delivery, packaging, cover checking and marking costs, and meet any other associated obligations.
The Buyers’ Obligations
At the same time, the buyer is responsible for:
- The payment of the amount reached upon in the agreement.
- The purchase of required licenses and associated authorizations and the receipt of the shipments at the port of destination.
- Transferring risk on reception of the shipments, taking up liability at that juncture for any damages or losses of the goods.
- Separation of the associated costs of the goods such as taxes, customs, duties and related official fees in addition to paying for the goods pre-shipment inspection charges.
- Notifying the seller on delivery timing, issuing proof of delivery, as well as meeting other mandatory obligations, including giving the seller required details for acquiring insurance.
Now, let me take you to yet another important stage on shipping Incoterms.
CIF VS. FOB – Which one is Better for Importers?
As earlier explained, with CIF, the seller does the customs clearance and meets all the costs necessary for the exportation of the goods including, loading onto the ship.
Furthermore, the seller bears all relating costs and risk while the shipment is in transit.
In the case of Free on Board, FOB arrangement, the seller takes care of the transportation of goods to the port of destination.
However, the delivery is assumed complete immediately the supplier releases the shipment to the importer, when the ordered goods are onboard the ship contrary.
Unlike the CIF, where liability and ownership shift to the buyer from the seller when the shipment docks at the destination port.
Why Ship FOB?
image source: edukazi
FOB is the most commonly recommended incoterm for most importers.
Because the term of sale allows the buyer to have sufficient control over both the freight costs and freight itself.
When an importer has the freedom to choose their own freight shippers, he or she definitely has great control over the freight.
He/she has the power to determine the transit time and route taken.
This gives the buyer the advantage of working with one freight forwarder during the whole transportation process. That makes communication simple.
I know you’re wondering how?
Because you will have a central point of communication for any questions or issues that may come up.
Dealing with one forwarding agent also guarantees that the shipper will be working for the best interests of the importer.
Because the primary purpose is to deliver the goods to the buyer’s specified port of destination.
Compared to CIF, where the buyer surrenders all control over the cargo yet acquiring most of the risk.
The seller is in charge of every phase of the shipment until it docks at the buyer’s designated port.
This gives the seller the freedom to contract their preferred freight carrier and determine the transit times.
In case of delay in shipment, the importer enjoys no recourse.
Normally, the buyer has no control over the transportation process and several carriers may be engaged in different stages.
Therefore, obtaining accurate details about the status of the shipment can be very difficult.
After all, the buyer is not the shipper’s customer, thus, no obligation to satisfy their interests.
And, one more thing…
The shipment is only insured up to the port of destination.
Implying, the importer must be prepared to handle customs and pay the necessary fees immediately the cargo reaches their designated port.
From the buyer’s view, any shipping agreement that gives them, control is most preferred.
FOB term gives the buyer more control over the freight shipping process than CIF.
Also, FOB provides control over the associated shipping fees and, ultimately, the general cost of your imports.
For most buyers, it is the most preferred incoterm.
Why Not Use FOB?
We advise new importers not to choose FOB because less liability should be borne by the buyer while goods are in transit.
New buyers who still do not understand the complexity of overseas transportation may make errors that can carry serious penalties.
Therefore, we recommend that new buyers select a CIF agreement until they get adequately conversant with the overseas importation procedure.
Why Not Use CIF?
Compared to FOB, CIF is a more expensive arrangement for buyers.
The seller will invoice you for their costs of insurance and ship the cargo.
Some suppliers might add extra fees in order to make a bigger profit.
In this case, you as the buyer ends up being charged more for the shipping.
Of course, it’s more than you would have been with a FOB arrangement.
But, that’s not all.
Surrendering control over your shipment may be of concern.
In case a problem arises with a CIF shipment, you as the buyer will have difficulties in getting accurate information about it.
It is because the buyers technically do not own the goods on transit.
Additionally, buyers depend on sellers to issue the Importer Security Filing document.
This calls for enormous fines and penalties when filed late by the buyer.
This dependence on the seller may expose buyers to vulnerable situations.
Since insurance is of importance in a cargo shipment, CIF agreement leaves the seller as the main beneficiary of the insurance coverage.
They own the goods in transit and the insurance policy.
Thus, in case a problem finds the goods while in transit, it is the seller who receives the compensation.
At the same time, the buyer had already paid for the goods.
The seller then has to either reimburse or reproduce the goods for you with the insurance compensation.
This most cases may have communication and legal issues.
CIF is a more expensive alternative when importing goods.
This is due to the fact that the seller contracts a freight forwarding agent of their liking.
At times, they may charge the buyer excess so as to have higher profit margins on the transaction.
And don’t forget.
Communication flow might as well be of concern since the buyer depends exclusively on people who are transacting on the seller’s behalf.
Additionally, the buyer might still incur additional costs at the port of destination.
Normally, this cost can be in the form of customs clearance and docking fees before their cargo can be cleared.
In a nutshell:
Each Incoterm has specific advantages and disadvantages to both involved parties.
While buyers prefer CIF and sellers FOB.
Basically, some trade engagements find one term favorable for all parties involved.
For instance, a seller with vast experience with the local customs would most probably take up CIF responsibility.
It is mainly to lure the buyer into taking up a deal.
Smaller parties would always prefer larger companies in the agreement taking liability, because this may lead to lower costs.
Other companies also have exclusive access through customs, filing freight fees when calculating the taxable amount, and other requirements that warrant a specific shipping agreement.
The main difference between CIF and FOB is on ownership and liability transfers.
Often in the majority of FOB agreements, ownership and liability shifts as soon as the shipment leaves the port of origin.
But with CIF, the obligation shifts to the buyer when the goods dock at the port of destination.
Often, we recommend CIF for sellers and FOB for buyers.
CIF enables sellers to get higher profit margins, FOB help buyers save on money and gives them control.
Nonetheless, we advise that new buyers opt for CIF as they learn the importing business and process.
CIF with other Incoterms
Now, let’s look at other Incoterms:
- CIF vs. CIP
CIF and Carriage and Insurance Paid (CIP) are similar in that the seller has the responsibility of paying for the insurance coverage of 110% of the value of the goods.
Normally, this is while they are onboard.
However, as CIF applies to only non-containerized sea freight, CIP covers all modes of transportation.
- How does CIF Insurance Work?
- Can you use CIF Terms with Letter of Credit?
- Is CIF Applicable to Domestic Shipments?
- How do you Calculate CIF Charges?
- When should you Consider using CIF?
- Does CIF include Unloading Charges?
- Are there any Key Changes and Updates of CIF Incoterms in 2020 edition?
- Can CIF be used for Air Freight?
- What does CIF Stipulate Regarding Cargo Security?
- What does CIF stipulate about Cargo Insurance?
- What is CIF Delivery?
- How does Risk Transfer in CIF takes place?
- What is CIF value?
- What does CIF Destination mean?
- Do CIF Terms Include Duty?
- Is CIF Suitable for Small Parcel Shipments?
- Who Regulates Rules in CIF Shipping?
- Is CIF Agreement Suitable when Importing from China?
- Is CIF Ideal for Containerized Cargo?
- More resources:
How does CIF Insurance Work?
Under CIF Incoterms, it is the buyer’s responsibility to ensure they take care of insurance charges for the shipment.
To ensure goods are appropriately insured, the formula of CIF value X 110% is used.
CIF value is obtained by adding commercial invoice value, insurance cost, and freight charges.
The 10% covers any unpredicted costs.
Insurance covers the repair and replacement of commodities at a location other than consignee’s facility.
However, if part of a shipment is damaged or lost, an insurance claim may be prorated.
Ideally, CIF needs clause C, which is a basic level of insurance appropriate for relatively bulk consignments but not manufactured commodities.
In case the shipment is underinsured, the insurer may only need to pay a certain percentage of the consignment.
If the products arrive damaged, it should be noted on the bill of lading at the time of arrival.
This is important since it helps in facilitating an insurance claim.
Can you use CIF Terms with Letter of Credit?
CIF is one of the favorable incoterms to use with a letter of credit when sourcing products from overseas suppliers.
Often, under CIF, delivery takes place before the main carriage.
In essence, the carrier gives the importer the transport document, which serves as a control mechanism for the goods.
This document is what is presented to the bank under a letter of credit then passed to the buyer for goods to be claimed.
Many banks and financial institutions do not have issues with issuing the letter of credit for CIF terms.
Even so, there are some instances where banks tend to make a complete mess of the clause surrounding insurance cover.
For instance, they could sometimes require you to present a policy and not necessarily the actual marine insurance certificate.
Also, they could incorporate technical words and requirements, which makes the deal a bit complicated.
Nonetheless, the buyer must demonstrate a willingness to abide by the terms and conditions of the bank.
Consequently, the bank will provide a letter of credit, which is used under CIF terms when shipping goods.
Is CIF Applicable to Domestic Shipments?
CIF incoterm is designed for cross-border shipping.
In principle, CIF is only applicable to ocean freight.
Therefore, it becomes relatively difficult to use it when shipping domestic consignments.
The terms in this incoterms outline the specifics regarding ocean freight hence cannot be used for domestic shipments.
How do you Calculate CIF Charges?
To calculate the CIF charges, you need to use the following formula;
Goods invoice + Insurance + Freight + Ex Works Charges.
In other words, CIF cost is the sum of all the above elements.
Ideally, goods invoice refers to the value of commodities as listed on the commercial invoice.
Insurance is the value charged by the respective insurer for the particular product you are shipping.
In many instances, cost of insurance is often based on a percentage of the consignment value.
The freight charge is the amount you pay the shipper for transporting the goods from port of origin to port of destination.
And Ex Works charges refer to the cost of transporting products from seller’s premises to a specific location.
Essentially, when calculating this cost, you must ensure you get it right because payable customs duty is pegged on the value.
When should you Consider using CIF?
Numerous circumstances make CIF a practical consideration in international shipping.
Generally, you would need to consider this option if you are new in international trade.
Alternatively, CIF would be ideal if you are shipping relatively small cargo.
CIF is a relatively convenient shipping mode since you will not necessarily need to deal with freight or other freight details.
Nonetheless, you must also understand that CIF shipping is a bit costly option compared to other means of shipping.
Does CIF include Unloading Charges?
It depends on the type of valuation basis on the CIF agreement.
Under CIF, it is the responsibility of the seller to pay for all forms of unloading charges till the specified place of a port.
The buyer, on the other hand, remains liable for the unloading charges at the port of destination and costs thereafter.
From an insurance and risk perspective, it is vital to clearly show the exact place of insured destination in sales contract.
Are there any Key Changes and Updates of CIF Incoterms in 2020 edition?
The Incoterms 2020 edition does not necessarily reflect any major updates and changes of CIF.
This rule dates back largely remains unchanged in international shipping.
Can CIF be used for Air Freight?
According to the stipulations of International Chamber of Commerce (ICC), the terms of CIF are strictly designed for ocean freight.
In other words, CIF can be used as an Incoterm only when the cross-border of goods is at least partially by water.
The specific provisions in CIF take care of shipments sent via sea and cannot be used in the case of air, road, or rail transit.
The obligations of both the buyer and the seller under CIF are defined based on ocean freight only.
Moreover, a CIF transaction will always read CIF port of destination.
For example, assuming you are exporting goods from China to Port of Incheon, the CIF transaction will simply read CIF Port of Incheon.
What does CIF Stipulate Regarding Cargo Security?
Arguably, cargo security is currently a major concern on shipping industry agenda.
Incoterms 2020 evaluates and scrutinizes the responsibilities by reference to different activities related to overall shipping process.
In practice, the core applicable security framework is usually the International Ship and Port Security Code (ISPS).
This code is an amendment to the International Convention for the Safety at Sea (SOLAS).
Technically, the obligation of security lies with the designated officials both at the ship level and for shipping terminals.
Often, the carriers will ensure that they charge for security/ISPS, borne by the respective party that contracts the carrier.
What does CIF stipulate about Cargo Insurance?
Generally, the incoterms are somewhat silent on matters regarding cargo insurance.
In this case, the buyer and seller each figure-out whether they wish to have the cargo insured.
But they have to agree on insurance cover for the part of the parts of the journey for which they’re liable for risk of loss or damage.
Under CIF, the seller must purchase cargo insurance for the portion of the journey where they are off-risk after goods delivered to the carrier.
Nevertheless, the insurance is for the benefit of the importer, who must claim it from insurance provider if necessary.
What is CIF Delivery?
This refers to a shipping term under CIF, which stipulates that the seller should be accountable for delivering goods to the destination port.
According to CIF delivery, the buyer has to organize for inland transportation of the goods until they get to the ultimate destination from port.
How does Risk Transfer in CIF takes place?
Risk transfer in Incoterm
Under CIF, there are two levels of risk transfer from one party to another.
From the seller’s perspective, the transit process is carried out by the seller from the point of origin to port of destination.
Therefore, the CIF risk of shipments resides with the seller for all this duration.
But once the seller loads the items on the shipping vessel bound for the buyer’s country, the risk shifts to the importer.
The damage uncertainty and duty of goods thus move to the importer.
In such instances, the damage and loss is borne to the buyer should he fail to advise the seller accordingly regarding destination port.
What is CIF value?
It refers to the total cost the seller incurs, which he should consider when quoting the price to the buyer under CIF trade deal.
To determine the actual CIF value, you need to add freight and insurance costs.
While calculating CIF value or cost, the seller needs to consider several factors.
For instance, the cost of making or processing goods, maintaining and packaging of the merchandise.
Moreover, the possible cost to incur in covering insurance and freight for shipping as well as unloading the products.
Ordinarily, it is necessary to calculate the CIF value accurately since duties are determined on the basis of this value.
What does CIF Destination mean?
Ideally, in international shipping, the consignment is always designed to dock at a specific port in the destination country.
Therefore, CIF destination merely means the ultimate port of destination where the shipment will be finally delivered to at the end of the transit process.
It is the specific place where the goods are finally unloaded from the vessel once they arrive at the port of destination.
In simple words, it refers to the importer’s country’s port where the risk transfers from the seller to the buyer.
In such instances, it is always important for the buyer to provide the correct port of destination where the shipment will dock.
Do CIF Terms Include Duty?
CIF is the obligation of the buyer, but it does not include any tax, import duties, or VAT.
However, it includes all the export requirements.
Under this incoterm, the seller is obligated to export and pay all the necessary costs to ship the goods to your port of destination.
Even so, the responsibility for importing and paying all costs associated with importation lies on you as the seller.
Is CIF Suitable for Small Parcel Shipments?
Not at all.
The design of CIF incoterm is to be used exclusively for ocean freight.
Of course, ocean freights are intended for large volume shipments.
Therefore, it would only be ideal to use this incoterm when shipping large shipments.
For small parcel shipments, it would be ideal to consider other modes of shipping incoterms.
Who Regulates Rules in CIF Shipping?
International Chamber of Commerce (ICC) is the sole agency regulating all the rules and regulations related to CIF shipping.
The headquarters of ICC is in Paris, France. However, all the major trading countries in the world adhere to the ICC incoterms stipulations.
Furthermore, this agency is responsible for revising the incoterm rules, with the latest revised version being 2020 edition.
In principle, all the rules and regulations in CIF shipping are acknowledged by courts and various authorities worldwide.
Of course, under CIF, the seller and buyer have a particular set of responsibilities, which guide the implementation of this incoterm.
Is CIF Agreement Suitable when Importing from China?
It is dependent on the prevailing circumstances.
CIF is one of the favorable incoterms, especially new importers.
When importing from China under CIF terms, it can be a great idea if you are sourcing products from a trading company or an agent.
If you are a new importer with less experience in shipping industry, CIF would be the best option to consider.
In essence, it protects you from possible risks such as loss or damage of the consignment while in transit.
However, it would also be vital to note that CIF would be unfavorable, especially if you are importing a relatively small quantity of goods.
Technically, the overall cost can frequently be much higher than what it would be when you choose to work with your ideal freight forwarder.
Is CIF Ideal for Containerized Cargo?
Compared to other incoterms, the risk transfer point of CIF is different from the cost transfer point.
Under CIF, the risk is transferred only when the commodities are loaded onboard the ship at port of origin.
Therefore, it makes CIF unsuitable for containerized cargo, which is often dropped off at the respective terminals days before loading.
Essentially, this creates a grey area during which the shipment could unknowingly damage.
Naturally, containerized cargo remains unopened until it gets to the ultimate destination.
Thus it would be nearly impossible to determine when the goods are damaged in case it happens.
In a nutshell, CIF is an unsuitable incoterm to consider when dealing with containerized cargo.
A better option for going through the importing process, whether you have chosen CIF, FOB or any other Incoterm is hiring the services of a competent freight forwarder.
These agents will go through the rigorous customs clearance process on your behalf.
They deliver the goods to your doorstep at affordable fees.
The freight agent will only issue you with an invoice after the goods have been delivered to you.
This invoice has a list of all the customs, taxes and port levies.
I strongly advise that you consider such companies at least during your first few overseas purchases.
Freight forwarding agents are relatively affordable considering the customs clearance hassle that you will go through if you decided to do everything by yourself.
Now, it’s your turn…
Do you have any questions on CIF shipping or any other incoterm?
Well, feel free to contact us.