Whether you are a seller or shipper, navigating the tricky waters of maritime shipping can be quite complicated.
Aside from outweighing the pros and cons of choosing the transport mode for a specific shipment of yours, you should also consider the costs and risks associated with the process. With that in mind, one of the first things you need to know about when dealing with ocean shipments is CIF Incoterm.
If you are wondering what is the CIF Incoterm meaning, and why it is so important for you to know, read on. This brief guide will cover all of that and more.
Overview of CIF in Shipping
CIF or Cost Insurance Freight is an incoterm that specifies that sellers will bear any damages or losses for the goods that are being transported to the buyers’ port with the help of insurance and freight. Once the goods reach the buyer’s port and are loaded on the ship, the risk transfers to the buyer.
CIF Incoterms refer to an important agreement that is used in global trade, and exclusively in maritime shipping. This agreement sets down the rules associated with the transportation of goods and classifies the risks and responsibilities associated with buyers and sellers when it is an overseas operation.
For the entire agreement process to be successful, the seller needs to organise a few key documents such as an insurance policy, invoice and bill of lading that can represent the cost, insurance and freight aspects of a shipment accurately.
CIF Incoterms Responsibilities of Buyers and Sellers
With the above definition of CIF in mind, let us now look at the key responsibilities of the buyers and sellers and the process of CIF incoterms ownership transfer.
Responsibilities of a Seller
When a seller agrees to enter a CIF agreement with the buyer, they agree to take up all the risks associated with transferring the shipment onboard a shipping vessel or container. It goes beyond fulfilling the most basic goal of ensuring that the shipment is loaded on the vehicle.
Some of these other responsibilities are as follows:
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Insurance: CIF incoterms insurance warrants that the seller will be responsible for insuring the shipment until it reaches the destination port.
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Export Packaging: The seller must ensure that the shipment is packaged appropriately and is ready for export. This also means selecting the right packaging material and meeting any specific regional packaging guidelines.
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Delivery to Port: Sellers also have to be accountable for incurring all the transportation costs related to delivering the cargo to the port.
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Origin Terminal and Loading Charges: The costs associated with loading a shipment onto the carrier vehicle from the seller’s warehouse are known as loading charges. Additionally, you may also have to pay handling charges at the origin terminal port.
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Export Duty, Taxes and Custom Clearance: All kinds of customs costs that you incur when exporting your cargo and additional relevant fees. It is a good idea to calculate your customs duties in advance before proceeding with the shipping process.
Responsibilities of a Buyer
Once the shipment or cargo is loaded onto the transport vehicle, and starts its transit to the destination, all the risks and responsibilities get transferred to the buyer. At this point, the buyer’s responsibilities include:
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Unloading at Destination: Once the shipment reaches the destination port, the buyer will have to bear the charges associated with unloading the cargo from the vehicle.
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Import Duty, Taxes and Customs Clearance: The buyer will also accept responsibility for all the import requirements including all the charges associated with customs and taxes.
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Delivery to Destination: It is the onus of the buyer to arrange transport to get the cargo from the destination port to the final destination.
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Destination Terminal Charge: Also known as destination handling charges, these are all the costs and charges associated with unloading the cargo from the vessel and moving it around within the terminal.
4 Primary Advantages for Sellers
Now that we have looked at the responsibilities that buyers and sellers fulfil as a part of CIF incoterms, let us look at some advantages you can enjoy by opting for them.
1. Adherence to Regulations
CIF agreements are prepared to keep in consideration compliance with the local and international logistics regulations. Regulatory compliance is crucial for companies that operate in multiple jurisdictions since the regulations and laws to be abided by can be different for each region.
2. Better Inventory Management
eCommerce businesses can maintain and optimise their inventory more effectively, and the shipping and insurance-related responsibilities are assumed by the seller. SMEs that have limited warehousing capacity and cannot spend a lot on scaling it up can benefit from opting for a CIF agreement.
3. Real-Time Tracking and Visibility
CIF incoterms allow sellers to track and monitor shipments in real time which can in turn let them offer more visibility to end customers. If yours is an eCommerce website where customer satisfaction is heavily associated with timely and transparent delivery, your platform can benefit from it.
4. Mitigation of Risks
The mandatory element of insurance included in CIF incoterms can provide a safety net to sellers, until all liabilities and responsibilities are transferred to the buyer. Unlike DDP shipping where the entire process relies on sellers, this approach is more divided.
The CIF incoterms risk transfer can be beneficial for shipments that contain high-value or delicate items that can cause a loss of reputation or revenue.
3 Primary Disadvantages for Sellers
Apart from the aforementioned benefits, you should also consider the following disadvantages when opting to enter into a CIF agreement:
1. Need for Upfront Financial Commitment
Sellers will need to pay for the freight charges and insurance even before they receive payment from buyers, thus presenting a significant financial commitment before the actual process even begins. This can pose a challenge to the cash flow of your business, especially if you deal with large shipment volumes or high freight charges.
2. Risk of Damage to Reputation
When sellers take complete accountability and responsibility for one part of such a multi-layered process, they risk their reputation not only their finances. While you will incur a significant amount of loss, you will also have to deal with the tarnished reputation that comes with a bad delivery experience and potential harm to the image of your brand.
3. Insurance Constraints
CIF Incoterms insurance coverage is quite basic and only covers the minimum warranted by the contract. If you are dealing with high-value shipments or delicate goods, this basic coverage will barely suffice to pay for any damages. If you purchase additional insurance coverage, the whole thing might increase the transportation costs.
Top 5 CIF Incoterms Risks
Here are some of the risks associated with CIF incoterms that you should know about and actively try to prevent:
1. Risk of Late Deliveries
The responsibility of sellers is only transferred after your shipment has been loaded onto the vehicle. Any delays or issues during transit or after this point can be costly for buyers, but even then, sellers may have to deal with the loss of potential revenue and reputation.
2. Discrepancies in Documentation
CIF agreements require sellers to carry out proper documentation diligently. These documents can include bills of lading, insurance documents and commercial invoices related to the shipment. The correctness of your CIF agreement relies on this documentation, and may even lead to payment delays or your goods getting stuck at the destination.
3. Risks in Quality and Compliance
The buyers may face quality and compliance risks since they don’t get to inspect the goods inside your shipment before transportation. As a result, you will have to face quality and compliance risks compared to the pre-established specifications.
Buyers may even face a lot of difficulties in getting replacements or costs of the goods if they find the goods to be of substandard quality.
4. Currency Fluctuations
As CIF incoterms are primarily associated with maritime and international shipping operations, they expose buyers and sellers to currency exchange risks. Any fluctuations in the exchange rates in the duration between the time of agreement and payment can cause financial losses to sellers and buyers alike.
5. Risk of Damage During Transit
Depending on the stage of transit in which your goods and shipment are damaged, the CIF incoterms insurance will be covered by either you, the seller, or the buyer. However, as mentioned before, this is minimal insurance coverage and will not be able to cover the costs of high-value items or damaged delicate items.
Concluding Remarks
Now that you have a clearer picture of what CIF incoterms are and everything that they entail, you can weigh their application on your business more effectively. By creating a CIF agreement with your buyers, you can divide the risks and CIF incoterms insurance responsibility associated with a shipment. It can be especially beneficial when your shipments are travelling internationally or across waters.
It is a good idea to get some external help if you are new to international shipping.Get a quote from the PACK & SEND website to get started.