How to choose CIF and FOB: what’s the difference?

Incoterms are crucial to international trades as they impact the quotation you receive from the seller, the shipment of the goods, and the responsibilities of both parties involved.

However, new buyers may not have a clear understanding of trading terms and may mistakenly ask for a FOB price instead of a CIF price, which may be more suitable for them. This miscommunication can lead to issues between the buyer and seller.

In most cases, CIF or FOB are the two most common shipping terms used (source: Wikipedia). To avoid miscommunication and ensure proper usage, this article will compare FOB vs. CIF from the following perspectives:

• Understanding CIF shipping terms and who is responsible for shipping risks
• Understanding FOB Shipping Terms
• CIF Price vs. FOB Price
• Why Do Buyers Prefer FOB/CIF Prices and When to Use Them?

Understanding CIF shipping terms and who is responsible for shipping risks

CIF stands for Cost, Insurance, and Freight. It is comprised of three fees: costs of goods, freight to the port in your country, and insurance. When using CIF shipping terms, you must choose a designated port in your country, such as CIF New York or CIF Los Angeles.

Let’s take CIF New York for example. It means that the seller will pay sea freight fees and insurance and send the goods to the Port of New York. You will then take delivery there, handle import customs clearance, pay import duties, and transfer goods from the port to your warehouse.

When it comes to who bears the risk of damage and loss, since the seller arranges the shipping, they are responsible for it until the goods reach New York. If the goods are damaged during shipping, the seller will assist you in communicating with freight forwarders and resolving any issues. Additionally, the seller will help you purchase cargo insurance and provide you with insurance policies. Therefore, if the goods are lost, you can file a claim with the insurance company.

When negotiating a shipping agreement under CIF delivery terms with the seller, it is important to clearly specify the port for picking up the goods, the shipping methods and costs, as well as the type and amount of the insurance purchased. This will help avoid any unnecessary disputes in the future.

Understanding FOB Shipping Terms

FOB, or Free On Board, means that the seller is responsible for delivering the goods to the appointed seaport in their country, while you have your own freight forwarder to complete everything after that, including arranging shipping to your destination, paying sea freight, buying insurance, and dealing with import customs clearance.

When using FOB shipping terms, you should specify the designated seaport, such as FOB Ningbo or FOB Shanghai. For instance, FOB Ningbo means that the seller will transport the goods from the factory to the Port of Ningbo, and you will take over the goods there and ship them to your destination in your country.

With regard to risk, before the goods arrive at the Port of Ningbo, the seller is responsible for any damage or loss. After the goods are on the ship, you should bear the risk, which is different from CIF. If your goods are damaged or lost during shipping, you need to contact your freight forwarder or the insurance company on your own.

For example, if the seller transfers the goods to the ship by hoisting and the cargo accidentally falls into the sea before boarding the ship, the seller is still liable for the damage, as the delivery of the goods has not been completed.

Typically, the seller will send the goods to the nearest port, as per FOB delivery terms. If you’re unsure, you can simply ask the seller and they will provide you with a quote based on that information. For instance, a seller based in Dongguan would send the goods to the Port of Shenzhen, while a seller situated in Suzhou would send the goods to the Port of Shanghai

CIF Price vs. FOB Price

When deciding between CIF or FOB, it’s important to consider the following: the responsibilities of the buyer and seller, who is responsible for any damage or loss during shipping, and the cost of the quotation provided by the seller. These are the main differences between the two terms. We’ve already discussed the first two, so now let’s focus on CIF vs FOB prices, which include different expenses.

For example, let’s say you’re buying a batch of goods from Yiwu, China, and shipping them to Los Angeles, USA. Typically, products from Yiwu are exported from the Port of Ningbo. The costs for this transaction would include:

• Product price: $10,000
• Cost of transportation from the factory to Port of Ningbo: $500
• Export customs clearance fees: $300
• Sea freight from Port of Ningbo to Los Angeles: $2,500
• Insurance Cost: $250

FOB Price

Under FOB shipping terms, the seller is responsible for arranging trucks to send the goods to Port of Ningbo and handling export customs clearance. These fees will be added to the price you pay. Therefore, the calculation for the FOB Ningbo price is:

FOB Ningbo price = product price + costs of transportation from the factory to the Port of Ningbo + export customs clearance fees.

i.e. FOB Ningbo price = $10,000 + $500 + $300 = $10,800.

CIF Price

With CIF shipping terms, in addition to sending the goods to the Port of Ningbo and handling customs clearance, the seller is also responsible for paying the insurance and sea freight to Los Angeles. These fees are included in the price you pay. Therefore, the calculation for the CIF Los Angeles price is:

CIF Los Angeles price = FOB Ningbo price + freight to Los Angeles + insurance.

i.e. CIF Los Angeles price = $10,800 + $2,500 + $250 = $13,800.

(Source: Brimich Logistics)

CIF Freight and Insurance

Regarding freight, it is updated weekly and in real-time during the epidemic. To accurately estimate freight costs, it is recommended that you inquire with the seller or freight forwarder for the latest rates.

If your goods are shipped by LCL under CIF delivery terms, you may encounter a situation where the Chinese forwarder charges you a very low sea freight rate initially. This may lead you to believe that you won’t need to pay any additional fees later on, but when you pick up the goods at the port, the forwarder charges you again. Although this may make you feel cheated, it is not a scam. Freight forwarders calculate LCL shipping costs in different ways.

For example, if you are transporting 3 CBM goods, you may receive different prices from 3 different forwarders. They may charge you only part of the total shipping costs initially, perhaps 30%, 10%, or even nothing, which can vary among different forwarders. They will then charge you again for the remaining costs when you pick up the goods at the port in your country. All of these charges are part of the total shipping costs that you will need to pay to the forwarders.

Therefore, a low price from some freight forwarders does not necessarily indicate that it is cheap because you may still need to pay additional fees later to make up the full costs.

As for insurance, the seller is required to purchase the minimum insurance for goods, which shall be (1+10%) of the CIF price. Therefore, the insurance paid equals CIF price × 110% × insurance rate. If you require higher insurance, you will need to reach an agreement with the seller or purchase additional insurance by yourself.

Onestopimport can help you reduce importation costs from China:

• Long-term cooperative suppliers to offer competitive product prices
• Familiar freight forwarders to provide you with real-time freight rates
• Appropriate quotations under EXW, FOB, CIF, door-to-door, etc.

Why Do Buyers Prefer FOB/CIF Prices and When to Use Them?

When buying from China, whether by sea or air, the goods must first be transported from the factory to a China port by truck before being shipped to your country. However, this is not an easy task. China is a large country with hundreds of ports and suppliers located in different regions. If you are unfamiliar with China and lack importing experience, transporting goods from the factory to the port can be a hassle.

Many buyers choose CIF or FOB to avoid this problem. Under FOB, the Chinese seller can help you send the goods to the port in China. You just need to know when the goods will arrive at the port and send your ship there to pick up the goods on time.

Under CIF, the seller will directly ship the goods to the port in your country, and you just need to receive your goods there. Both of these options can save you from many troubles.

However, FOB or CIF is not suitable for everyone. If you want to use FOB, it is recommended that you have your own familiar freight forwarder to ship goods from the port in China to your destination. Otherwise, please ask your seller for the CIF price and arrange shipping for you.

In addition, if you need to collect goods from different sellers at the same port in China and then send them together by LCL or FCL, FOB is a good choice. All of your sellers can send the goods to the same appointed seaport where your freight forwarder can collect and load them into the container.

Onestopimport can help you buy goods from several sellers and package them together, then arrange FOB or CIF shipping for you.

Conclusion

Thank you for reading this straightforward guide on the distinctions between CIF and FOB. If you have any further inquiries, please do not hesitate to leave a comment below.

At Onestopimport, we are a prominent Chinese sourcing company with extensive expertise in assisting importers with buying, customizing, and shipping products from China at affordable rates. Our team is dedicated to providing effective solutions to any business-related issues that you may encounter. If you require assistance, please do not hesitate to contact us.