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.
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.