FOB VS CFR (Incoterms)
Looking to ship something from China to just about anywhere across the globe? It’s a good idea to understand the lingo in the shipping world. Trust me, it’s going to make your selection process way smoother, and you won’t end up confused by all the fancy industry terms.
Living in the 21st century with the world wide web at our disposal, we all know it’s good practice to be in-the-know, especially when it deals with our day-to-day!
So, what are we getting into today? We’re diving deep into the world of FOB vs CFR (Incoterms). By the time you finish this read, you’ll feel like a pro in this field.
Now, let me introduce you to Super International Shipping — your reliable buddy in the puzzling world of freight forwarding. Let’s be honest, international trade can sometimes feel like a jigsaw puzzle with terms like FOB (Free on Board) and CFR (Cost and Freight). But that’s why we’re here. At Super International Shipping, our goal is to make things simpler for you by offering strategic, efficient, and budget-friendly shipping solutions. Come along as we unravel FOB and CFR and see how they might shape your international trading game plan in 2023 and beyond.
What is incoterms?
Before we jump into the whole FOB vs CFR conversation, let’s first get cozy with incoterms. ‘Incoterms’ is short for International Commercial Terms, crafted by the big wigs at the International Chamber of Commerce.
These terms are like the rulebook for figuring out costs and responsibilities split between sellers and buyers. They cover a whole range of stuff like:
- How goods are transported
- The ins and outs of clearing goods
- The what’s what of importing and exporting goods
- Who picks up the check
- Who’s holding the bag if things go sideways during moving and transferring goods through different stages
- And all the nitty-gritty stuff in between when it comes to getting your goods from point A to point B.
In short, incoterms are the playbook for the freight forwarding world from sellers to buyers.
In essence, incoterms are the golden rules that govern all international trade activities involving the sale and transportation of goods.
Whether you’re looking to import goodies from abroad or export your local treasures, these rules are your go-to guide. No matter your trade direction, incoterms have got your back.
What is FOB?
Let’s chat about FOB or “Free On Board.” In the shipping world, this Incoterm is like a deal between the seller and buyer. Here’s how it works: the seller’s job is to get the goods safely to a specific port, make sure they’re loaded onto the ship, and have them cleared for export. The seller can dust their hands off once the goods have crossed the ship’s rail at the decided shipment port.
But here’s where it gets interesting. From this point on, it’s the buyer who takes over the reins. All the responsibilities, including any risk of damage or loss, now rest on the buyer’s shoulders.
FOB doesn’t just stop there. It also means that the moment those goods are on board, the buyer is in the driver’s seat. This includes covering the shipping costs and taking on any risk of loss once the goods are loaded onto the ship. Costs of insurance, unloading, transportation from the arrival port, and any customs duties or taxes that come up? That’s all on the buyer’s tab.
The beauty of FOB is how it neatly lays out who’s in charge of what during the shipping journey. Plus, it’s crystal clear about when the baton of goods ownership gets passed from seller to buyer.
What is CFR?
Now, let’s unpack CFR, or “Cost and Freight.” This international trade term refers to a shipping deal where the seller pulls the strings. They’re the ones arranging sea travel and footing the bill for getting the goods all the way to the destination port. This includes everything from the actual freight costs to the expense of loading goods onto the ship and clearing them for export.
But here’s the kicker: even though the seller handles the transport and cost under CFR, the moment those goods are on the ship, the risk of loss or damage jumps over to the buyer. So, if anything unfortunate happens to the goods during transit, it’s the buyer, not the seller, who’s on the hook.
And there’s more. The buyer also handles getting insurance, covers unloading costs, and deals with any customs duties or taxes that might pop up at the final destination.
FOB VS CFR
Ready to dive into the FOB vs CFR showdown? First, let’s get comfortable with what these acronyms mean. FOB is short for “Free on Board,” while CFR stands for “Cost and Freight.”
In the FOB scenario, the seller gets the goods to a specific ship. If any hiccups occur while loading the goods onto the ship, the buyer’s got to handle them.
In the CFR case, the seller also gets the goods onto the ship. But the twist here is that the seller also covers all the freight transportation costs to the port.
Alright, now that we’ve got the basics down, let’s get into the nitty-gritty of FOB vs CFR.
Key Considerations When Choosing Between FOB and CFR
When it comes to picking between Free On Board (FOB) and Cost and Freight (CFR), it really boils down to what your business needs are, what kind of goods you’re shipping, and the finer details of your shipping agreement. Here’s what you should be thinking about when you’re weighing FOB against CFR:
Let’s talk about the Moment of Risk Transfer: In both FOB and CFR, the risk is passed from the seller to the buyer as soon as those goods are loaded onto the ship. But with CFR, the seller also arranges and pays for the journey to the destination port.
Now onto Cost Responsibility: Under FOB, the buyer takes care of the freight and insurance costs once the goods are aboard the ship. But under CFR, the seller foots the freight bill to the destination port, though they don’t cover insurance.
What about Insurance? If the buyer wants to sleep easy knowing the goods are insured during transport, they might prefer FOB, as they’ll arrange the insurance. Under CFR, there’s no obligation for the seller to insure the goods during their voyage.
Looking at the Nature of the Goods: If the goods being shipped could easily be damaged during loading, the buyer might lean towards FOB where they assume responsibility only after the goods are safely on the ship.
Talking Customs Clearance: Whether it’s FOB or CFR, the seller handles clearing the goods for export. However, when it comes to import clearance and any associated duties or taxes, that’s always on the buyer.
Who has Control Over Shipping? If the buyer likes to be in the driver’s seat during the shipping process, they might go for FOB, which requires them to arrange the main carriage. If the seller prefers to keep control, CFR might be their best bet.
By considering these factors, businesses can balance between FOB and CFR and make an informed choice that best suits their needs and minimizes potential risks.
How Insurance Factors into FOB and CFR Shipping Terms
Insurance is a key player in managing risk in international shipping, whether you’re dealing with FOB (Free On Board) or CFR (Cost and Freight) terms. But who’s in charge of getting the insurance differs.
In the FOB world, once the goods are on the ship, it’s the buyer who’s got to get them insured. This gives the buyer the freedom to pick an insurance policy that fits their risk evaluation and unique needs like a glove.
On the other hand, under CFR, while the seller organizes and pays for the transport to the destination port, the buyer takes on the risk as soon as the goods are loaded on the ship – and this includes getting insurance.
That’s why it’s so important for both parties to really get under the skin of their insurance duties under each term. This ensures everyone’s got the right coverage and that risk management is firing on all cylinders.
The difference between Tasks of Buyer in FOB VS CFR
In both FOB (Free on Board) and CFR (Cost and Freight) shipping terms, the buyer has certain tasks they need to handle. Here’s how they differ:
- Firstly, under both FOB and CFR, the buyer is responsible for footing the goods’ price as per the contract.
- When it comes to providing licenses, there’s a difference between FOB and CFR. Under FOB, it’s optional for the buyer to arrange all licenses at their own cost. But under CFR, it’s a must for the buyer to supply all licenses.
- Talking about transportation costs from the designated port, under FOB, the buyer has to cough up the cash. But under CFR, the buyer doesn’t owe the seller anything when it comes to concluding the contract of carriage.
- As for delivering the goods, under both FOB and CFR, it’s the buyer who must take the goods when they’re delivered.
- When we look at losses from the time of delivery, under both FOB and CFR, the buyer has to cover all losses from the moment the goods are delivered.
- Regarding costs after receiving the goods, with both FOB and CFR, all costs after receiving the goods are on the buyer, except for the Customs fee.
- Finally, when it comes to providing shipping information, in the FOB method, the buyer must give the seller all the details about the ship’s name, loading point, and if needed, delivery time within the agreed timeframe. However, under CFR, if the buyer has the right to decide the time of goods transportation or to deliver them at a specific destination, they must pass along all this information to the seller.
Who must do the clearance of goods in FOB and CFR?
Under both FOB (Free on Board) and CFR (Cost and Freight) shipping agreements, the seller has certain obligations, depending on the circumstances.
One key requirement is that the seller must clear the goods for export in both FOB and CFR scenarios. That means taking care of all the paperwork and processes required to get the goods out of the country.
However, it’s important to note that the seller is not obliged to clear the goods for import. This means they don’t have to sort out the paperwork or processes to bring the goods into the buyer’s country.
Furthermore, under both FOB and CFR, the seller is off the hook when it comes to paying any import duties.
Lastly, the seller doesn’t have to handle any customs formalities for import. This remains the responsibility of the buyer.
In short, while the seller has to clear the goods for export, they don’t have to worry about clearing the goods for import, paying import duties, or dealing with import customs formalities. These are the buyer’s responsibilities.
| Factors | FOB (Free On Board) | CFR (Cost and Freight) |
| Delivery Point | The seller delivers the goods onto the ship at the departure port. | The seller not only gets the goods on board the ship but also organizes transportation to the arrival port. |
| Cost Responsibility | The seller picks up the tab until the goods are on the ship. From then on, the buyer takes over the costs, which include freight and insurance. | The seller pays for freight all the way to the destination port. But once the goods are on the ship, the buyer picks up the costs, including insurance. |
| Risk Transfer | The moment the goods are on the ship at the departure port, the risk is transferred to the buyer. | The risk moves over to the buyer as soon as the goods are on the ship. However, the seller is in charge of organizing transportation. |
| Insurance | Once the goods are on the ship, it’s the buyer who has to get them insured. | The seller doesn’t need to insure the goods while they’re being transported. This is a task that falls onto the buyer’s plate. |
| Customs Clearance | The seller sorts out the export clearance. When it comes to import clearance, that’s the buyer’s job. | Just like with FOB, the seller deals with the export clearance. And the buyer has to handle the import clearance. |
Navigating Shipping in 2023: A Closer Look at FOB vs CFR
As we sail through the intricate world of shipping in 2023, understanding the ins and outs of FOB (Free On Board) and CFR (Cost and Freight) shipping terms is crucial. With the emergence of new shipping technologies and the ever-changing global trade scene, these terms have taken on even greater importance.
FOB and CFR are not just fancy acronyms. They’re fundamental to any international shipping contract. They spell out who’s responsible for what, who bears the risks, and who covers the costs at each phase of the shipping journey.
Given the rise in globalization and the increasing complexity of supply chains, getting to grips with the finer details of FOB and CFR is going to be key. It’ll help manage risks, keep costs in check, and ensure that goods keep moving smoothly across borders, not just in 2023, but beyond.
Where is the international shipping method FOB not suitable?
The FOB is not appropriate when the goods are delivered to the carrier before being loaded on the ship, for example, goods loaded in a container, which is usually delivered at the terminal. In such cases, the term FCA should be used.
This is because the point of transfer for risk and responsibility under FOB is when the goods cross the ship’s rail. However, with containerized goods, the crucial event often occurs before the goods are loaded onto the ship. Therefore, using FOB could create confusion about when risk and responsibility transfer from the seller to the buyer. To avoid such ambiguity and potential disputes, the FCA (Free Carrier) Incoterm, which clearly designates the seller’s responsibility up until the goods are handed over to the carrier at a specified location, should be utilized instead.
ConclusionÂ
Mastering the intricacies of FOB and CFR is a must in the realm of international commerce, and Super International Shipping is here to be your compass. As we sail into 2023, knowing these terms inside out becomes increasingly important.
Teaming up with Super International Shipping as your freight forwarding ally gives you the confidence to tackle the ever-changing hurdles of global shipping head-on. We stay dedicated to offering strategic, streamlined, and cost-friendly solutions that fit your business requirements like a glove.
Embark on a journey of smooth, trouble-free shipping with Super International Shipping, and take your international trade operations to unprecedented heights.
FAQÂ
What is the main difference between FOB and CFR?
The primary difference between FOB (Free On Board) and CFR (Cost and Freight) lies in who is responsible for arranging and paying for the main carriage. In FOB, this is the buyer’s responsibility, while under CFR, the seller is responsible.
Can FOB and CFR be used for all types of transportation?
Traditionally, FOB (Free On Board) and CFR (Cost and Freight) are specifically tailored for use in sea or inland waterway transport. When it comes to multi-modal transportation, terms like CPT (Carriage Paid To) or CIP (Carriage and Insurance Paid to) are generally the go-to choices.
What does FOB stand for in shipping terms?
FOB stands for Free On Board. It indicates that the seller’s obligation is to load the goods on board the ship nominated by the buyer.
Can the terms FOB and CFR be modified in a contract?
Yes, the terms can be modified but any changes should be clearly stated in the contract to avoid confusion or disputes.
What happens if the goods are damaged in transit under FOB and CFR terms?
Under both FOB and CFR, risk transfers from the seller to the buyer once the goods have been loaded onto the ship. Therefore, if the goods are damaged in transit, it’s generally the buyer’s concern.
What happens if the goods are not loaded onto the ship on time under FOB and CFR terms?
If the goods aren’t loaded on time, it’s generally the seller’s responsibility, as they’re in charge of delivering the goods to the agreed point of shipment.
What is the importance of Incoterms in FOB and CFR?
Incoterms, like FOB and CFR, provide a universal set of rules and guidelines that help clarify the tasks, costs, and risks associated with international trade. They’re crucial in avoiding misunderstandings and disputes.
Why is understanding FOB and CFR important for international trade?
Understanding FOB and CFR is important because these terms dictate who bears the costs, risks, and responsibilities at each stage of the shipping process.
How are disputes resolved under FOB and CFR terms?
Disputes under FOB and CFR terms are typically handled through legal proceedings, arbitration, or mediation, depending on the provisions in the contract.
Can the buyer arrange for transport under FOB terms?
Yes, under FOB terms, the buyer is responsible for arranging transport from the port of shipment.
What happens if the seller fails to deliver the goods to the agreed location under FOB and CFR terms?
Under both FOB and CFR, if the seller fails to deliver the goods to the agreed location, they could be held liable for breach of contract. The precise consequences would depend on the terms of the contract.
