As a beginner in international Business, understanding the various shipping terms (also known as Incoterms) is crucial to ensure smooth, efficient, and cost-effective transactions. Whether you’re importing goods for your business or shipping products to international customers, the shipping terms you agree on will determine who bears the costs, responsibilities, and risks throughout the transportation process.
International shipping can often feel overwhelming for new buyers due to the many responsibilities involved in moving goods from one country to another. That’s why having a solid understanding of these terms is essential for avoiding unexpected costs and logistical issues. This guide will break down the 11 most important shipping terms every beginner buyer needs to know.
What is international Commercial Terms ?
Incoterms are shortened for International Commercial Terms, Such as EXW, FOB, CIF, and others define the responsibilities of buyers and sellers in the shipping process, ensuring that both parties understand who is responsible for transportation, costs, and risks at various stages.
For any beginner buyer, navigating these terms can feel overwhelming, but with a solid understanding of key Incoterms, you can make smarter, more informed decisions in your international shipping deals.
1. EXW (Ex Works)
Explanation:
EXW (Ex Works) is one of the most basic shipping terms where the seller’s only responsibility is to make the goods available for pickup at their location (warehouse, factory, etc.). The buyer assumes full responsibility for all transportation costs and risks, from the seller’s location to the final destination.
Example:
Imagine you’re importing office furniture from a supplier in China. Under EXW, the seller is responsible for having the goods ready for pickup at their warehouse. From that point, it’s your responsibility to arrange for transportation, customs clearance, insurance, and any other associated costs until the goods reach your location in the U.S.
Tips for Buyers:
- Best For EXW is often chosen by buyers who have strong logistics partners or prefer to handle the entire shipping process themselves.
- Newbie Advice: As a beginner buyer, it’s important to be aware that EXW places the maximum responsibility on you. If you’re not familiar with international shipping processes or don’t have established relationships with logistics companies, EXW can be a complex choice. It’s often better to opt for terms where the seller shares some responsibility for transportation and insurance.
2. FOB (Free On Board)
Explanation:
FOB is one of the most commonly used Incoterms in international shipping, especially for sea freight. In this arrangement, the seller is responsible for all costs and risks up until the goods are loaded onto the shipping vessel at the port. From that point onward, the buyer assumes the risk and transportation costs.
Example:
Let’s say you’re purchasing clothing from a manufacturer in India. The manufacturer will handle the goods up to the point where they are loaded onto a ship at the port of Mumbai. Once the goods are safely on board, it’s your responsibility to cover any further costs (like shipping fees to your destination port, insurance, and customs) and manage the risk of damage or loss during transit.
Tips for Buyers:
- Best For Buyers who are familiar with sea freight and want the seller to handle the initial steps, such as transportation to the port and loading onto the vessel.
- Newbie Advice: FOB is ideal for buyers who prefer the seller to handle the local logistics in the country of origin. However, remember that you’ll need to manage all risks once the goods are loaded. Make sure to secure adequate marine insurance to protect yourself from potential losses during transit.
3. CIF (Cost, Insurance, and Freight)
Explanation:
CIF (Cost, Insurance, and Freight) requires the seller to arrange and pay for the transportation of goods to the buyer’s destination port, including the cost of freight and insurance during transit. However, the risk of loss or damage passes to the buyer once the goods are loaded onto the shipping vessel.
Example:
Imagine you’re importing electronics from South Korea. Under CIF, the South Korean seller would arrange and pay for the shipping of your goods to the destination port in Los Angeles, including marine insurance to cover potential risks during transit. However, despite the seller handling the logistics and insurance, the risk transfers to you once the goods are loaded onto the vessel in South Korea.
Tips for Buyers:
- Best For Buyers who want the seller to handle both freight and insurance, offering peace of mind that the goods are protected until they reach the destination port.
- Newbie Advice: CIF is a good choice for beginners because it shifts some responsibility (such as organizing shipping and insurance) onto the seller. However, since risk transfers once the goods are on board the ship, you should be prepared to manage any issues that arise after that point, such as customs clearance and inland transportation.
4. FCA (Free Carrier)
Explanation:
FCA (Free Carrier) means that the seller delivers the goods to a carrier or another person chosen by the buyer at an agreed location. The seller is responsible for export clearance, but the buyer assumes all risks and costs after the goods are handed over to the carrier.
Example:
Suppose you’re purchasing automotive parts from Japan, and you’ve arranged for a freight forwarder to handle the shipping. Under FCA terms, the Japanese supplier will deliver the parts to your freight forwarder at a specified location in Japan. From that point onward, the costs and risks transfer to you, and your freight forwarder will take responsibility for shipping the goods.
Tips for Buyers:
- Best For: Buyers who want the seller to handle export clearance but prefer to manage transportation with their chosen carrier.
- Newbie Advice: FCA is a flexible option for buyers using different types of transportation (air, sea, or land). For beginners, it’s essential to coordinate closely with your carrier or freight forwarder to ensure smooth transportation after the seller hands over the goods.
5. CFR (Cost and Freight)
Explanation:
Under CFR (Cost and Freight), the seller is responsible for paying the costs and freight required to transport the goods to the destination port. However, the risk transfers to the buyer once the goods are loaded onto the shipping vessel, similar to FOB.
Example:
You’re an e-commerce retailer importing consumer goods from Vietnam. Under CFR terms, the Vietnamese supplier will cover the shipping cost to the destination port in the U.K. However, once the goods are loaded onto the vessel at the port in Ho Chi Minh City, the risk of any damage or loss passes to you.
Tips for Buyers:
- Best For: Buyers who want the seller to arrange and pay for transportation to the destination port, but are willing to handle the insurance and risks after the goods are on board.
- Newbie Advice: Like CIF, CFR can be useful for buyers who want the seller to take care of the shipping costs. However, since it doesn’t include insurance, it’s wise to purchase your own coverage to protect against potential damage during transit.
6. DAP (Delivered At Place)
Explanation:
DAP (Delivered At Place) means that the seller is responsible for delivering the goods to the buyer’s location, which can be a terminal, warehouse, or any agreed destination. The buyer is responsible for any import duties or unloading costs. The risk transfers from the seller to the buyer once the goods arrive at the destination and are ready for unloading.
Example:
You’re purchasing large quantities of office supplies from a supplier in Mexico, and you want the goods delivered directly to your warehouse in the U.S. Under DAP, the Mexican supplier arranges for transportation and delivers the goods to your warehouse. Once the goods arrive at your facility, it’s your responsibility to handle unloading and any further costs, such as import duties.
Tips for Buyers:
- Best For Buyers who want a relatively hassle-free shipping process and prefer the seller to handle most of the transportation logistics.
- Newbie Advice: DAP is ideal for beginners because the seller takes on most of the responsibilities, including shipping and delivery. However, be aware that you’ll still need to take care of any import duties and the unloading process when the goods arrive.
7. DDP (Delivered Duty Paid)
Explanation:
DDP (Delivered Duty Paid) is one of the most buyer-friendly Incoterms. The seller takes full responsibility for delivering the goods to the buyer’s location, including transportation, customs clearance, and payment of all duties and taxes. The buyer only assumes responsibility once the goods have arrived and are ready for unloading.
Example:
Suppose you’re importing high-end electronics from Germany for your retail business in Australia. With DDP terms, the German seller arranges everything—from transportation to customs clearance—and covers all taxes and duties. Once the goods arrive at your store in Australia, it’s your responsibility to unload the goods.
Tips for Buyers:
- Best For: Buyers who want to minimize involvement in the shipping and customs process, preferring the seller to take care of everything.
- Newbie Advice: DDP is an excellent choice for beginner buyers because the seller handles every step, including customs and taxes. This option offers the least hassle but may come with higher costs due to the seller covering all the risks and responsibilities.
8. CPT (Carriage Paid To)
Explanation:
Under CPT (Carriage Paid To), the seller pays for the transportation of goods to the named place of destination, which could be a port, terminal, or warehouse. However, the risk transfers to the buyer once the goods are handed over to the first carrier (for example, when the goods are loaded onto the truck, ship, or airplane). The buyer is responsible for handling customs and duties at the destination.
Example:
You’re importing raw materials from a supplier in Brazil to your factory in Spain. Under CPT terms, the Brazilian seller arranges for transportation to the destination port in Spain. Once the goods are loaded onto a truck in Brazil, the risk transfers to you, though the seller continues to handle transportation.
Tips for Buyers:
- Best For Buyers who want the seller to handle transport but prefer to manage the risk and costs from the moment the goods are handed over to the carrier.
- Newbie Advice: While the seller pays for shipping, you take on the risk early in the process. If you choose CPT, make sure you have a trusted carrier and consider purchasing insurance to protect the goods during transit.
9. CIP (Carriage and Insurance Paid To)
Explanation:
CIP (Carriage and Insurance Paid To) is similar to CPT, but in addition to paying for the transportation costs, the seller is also required to purchase insurance to cover the buyer’s risk during transit. The seller arranges and pays for insurance that covers the goods until they reach the final destination. However, like CPT, the risk transfers to the buyer once the goods are handed over to the carrier.
Example:
You’re purchasing electronic components from a supplier in Japan. Under CIP, the Japanese seller arranges and pays for transportation and insurance to cover the shipment to your destination in the U.K. Once the goods are handed over to the carrier in Japan, the risk transfers to you, but you’re protected by the insurance that the seller has arranged.
Tips for Buyers:
- Best For Buyers who want the seller to arrange transportation and insurance, ensuring protection during transit.
- Newbie Advice: CIP is a great option for beginners because it includes insurance coverage. However, make sure to understand the terms of the insurance and how much protection it offers to avoid unexpected gaps in coverage.
10. FAS (Free Alongside Ship)
Explanation:
FAS (Free Alongside Ship) means that the seller is responsible for delivering the goods to the port and placing them alongside the vessel. The buyer assumes all costs and risks from the moment the goods are placed alongside the ship, including loading, shipping, insurance, and further transportation.
Example:
Let’s say you’re importing raw materials from a supplier in Egypt. Under FAS terms, the Egyptian supplier transports the goods to the port in Alexandria and places them alongside the ship. Once the goods are at the port and ready for loading, the responsibility and cost transfer to you.
Tips for Buyers:
- Best For Buyers who have established relationships with shipping companies and want to take control of the sea transport process.
- Newbie Advice: FAS is mainly used for sea freight and places significant responsibility on the buyer. As a beginner, it’s important to ensure that you have a reliable shipping partner who can handle loading and transportation after the goods are placed alongside the vessel.
11. DAT (Delivered at Terminal)
Explanation:
Under DAT (Delivered at Terminal), the seller is responsible for delivering the goods to a specific terminal at the destination. The terminal could be a port, airport, or logistics hub. Once the goods arrive at the terminal and are unloaded, the risk transfers to the buyer, who is then responsible for any additional transportation or customs costs.
Example:
You’re purchasing construction materials from a supplier in Germany. The seller agrees to deliver the goods to a terminal in New York. Under DAT, the German supplier handles all the shipping and unloading at the terminal, but once the materials are unloaded, the responsibility for any further transportation to your job site falls on you.
Tips for Buyers:
- Best For Buyers who want the seller to handle transportation and unloading at a specific terminal but are prepared to manage transportation beyond the terminal.
- Newbie Advice: DAT simplifies the shipping process because the seller handles both transport and unloading. However, be prepared to arrange for transportation from the terminal to your final destination and take care of any customs clearance.
Conclusion
Shipping terms, or Incoterms, play a crucial role in international trade, defining the responsibilities of both buyers and sellers when it comes to transportation, costs, and risks. For beginner buyers, understanding these 11 key terms—such as EXW, FOB, CIF, DDP, and others—can help you navigate the complexities of shipping with confidence. By choosing the right shipping term, you can minimize risks, avoid unexpected costs, and ensure that your goods reach their destination efficiently and securely.
Summary:
Understanding Incoterms like EXW, FOB, and CIF can drastically improve your ability to handle international shipping. By knowing who is responsible for what, you can minimize risks, control costs, and ensure smoother transactions in global trade.
