FOB vs CIF
FOB and CIF are International Commercial terms, or Incoterms, as they are popularly known. There are lots of acronyms, all 3 lettered, and having a predefined meaning that is easily understood by both buyers and sellers in international trade. In fact, Incoterms is a registered trademark of the International Chamber of Commerce. However, people are always confused between CIF and FOB because of many similarities. This article attempts to differentiate between these two Incoterms to remove all doubts from the minds of readers.
FOB
FOB stands for Free on Board, and is a contract between the buyer and seller, where the seller has to load the goods himself on a vessel that has been nominated by the buyer. It is the duty of the seller to clear the goods for export, and the cost as well as risk is clearly divided between the buyer and seller when the goods are on the vessel. The details of the port and the vessel have to be intimated by the buyer to the seller.
CIF
CIF stands for Cost, Insurance, and Freight and seller has to pay all the costs along with freight to bring the goods to destination port. However, as soon as goods are loaded on to the vessel, the risk gets transferred on to the buyer. It also stipulates the seller to arrange for, and pay for insurance of the goods.
What is the difference between FOB and CIF?
Talking of differences, once goods have been loaded on to the vessel, they become a risk of the buyer in case of FOB. However, in case of CIF, seller not only brings goods to the port of destination, he also has to procure and pay for insurance against buyer’s risk of loss or damage to the goods during transit.
Buyers, especially when they are new or when the freight volume is low, prefer CIF as they are assured that the seller is responsible for all fright and insurance issues. Though, importer has no control over choice of vessel, routing and other shipping details, he is lured by the prospect of more savings and conveniences. However, once freight volume grows or when the number of shipments grows, CIF starts to pose difficulties and this is when importers prefer FOB.
Summary
FOB has two major advantages vis-à-vis CIF. FOB provides more competitive fright rates and enhanced control over shipment. For importers who are cost sensitive, FOB is often the first choice. Shipping control is many times more important for the buyers and being able to get accurate and timely information is critical in many circumstances.