Sea freight is one of the cheapest and most profitable for entrepreneurs. However, when it comes to import and export, you can get confused in the terms of delivery. Which one to choose so as not to overpay and not lose the goods – CFR, CIF or another format altogether?
CFR and CIF – what do they mean in simple words
CFR delivery terms – this concept is translated as “Cost and Freight”. This type of transportation is used in cases where the seller pays for delivery to the port of destination. However, the risks for the goods pass to the buyer earlier – when the goods are loaded onto a vessel at the port of shipment.
That is, if the container is damaged or lost at sea – the buyer, not the seller, bears the losses.
CIF delivery terms – this concept is translated as “Cost, Insurance and Freight”. This type of transportation is used in cases where the seller pays not only for delivery to the port of destination, but also for insurance of the goods. But the risks pass to the buyer when the container with the goods crosses the ship’s side at the port of shipment.
That is, if the container is damaged or lost at sea, the buyer must contact the insurance company, not the seller.
For which transportations are CFR and CIF suitable
CFR Incoterms and CIF Incoterms are used exclusively for sea and river transportation. CFR and CIF are not suitable for road, air and rail.
CFR delivery terms: who pays and for what is responsible
What the seller must do according to CFR:
prepare the goods for transportation, ensure packaging and labeling;
- prepare documents for export;
- deliver the goods to the port of shipment;
- load the goods onto the vessel;
- pay for the freight (transportation) to the port of destination.
What the buyer must do according to CFR:
- assume all risks of damage to or loss of the goods;
- prepare documents for import;
- pay for unloading at the port of destination;
- perform further delivery (from the port to the warehouse or other destination).
Neither the seller nor the buyer is obliged to insure the goods for transportation.
CIF delivery terms: who pays and for what is responsible (Incoterms 2020)
What the seller must do according to CIF Incoterms 2020:
- prepare the goods for transportation, ensure packaging and labeling;
- prepare documents for export;
- deliver the goods to the port of shipment;
- load the goods onto the vessel;
- pay the freight to the port of destination;
- arrange and pay for insurance in favor of the buyer (at least minimum coverage).
What the buyer must do according to CIF Incoterms 2020:
- assume all risks of damage to or loss of the goods after they are loaded onto the vessel;
- obtain the right to insurance compensation in case of damage;
- prepare documents for import;
- perform further delivery (from the port to the warehouse or other destination).
Although the seller provides insurance, the buyer can purchase additional insurance.
Transfer of risk under CFR and CIF: where and when
According to CFR, the transfer of risk occurs when the goods are on board the vessel at the port of shipment, not when they arrive at the port of destination.
According to CIF, the transfer of risk occurs when the goods are on board the vessel at the port of shipment.
CIF vs CFR: the main difference – insurance (and what does it change for the buyer)
What is the difference in the terms of delivery of CIF and CFR? It is the only one, but critical – insurance. For CIF, it is provided by the seller, for CFR – by the buyer (if necessary).
Examples with insurance (CIF vs CFR):
- if under CFR the container is lost at sea – the buyer will lose both the goods and money if he did not take out any insurance;
- if under CIF the container is lost at sea – the buyer files a claim with the insurance company and receives compensation.
Often, the minimum insurance coverage under CIF does not “save” in the event of such serious risks as theft, delays, losses and even partial damage. Therefore, even under CIF, buyers often additionally insure the goods, especially if they are expensive and fragile.
In both cases, the seller is responsible for providing the buyer with the most important document in sea transportation – the bill of lading (B/L). Also, the risk is transferred equally in CIF and CFR.
What to choose: CIF or CFR (practical tips)
How to understand what to choose – CIF vs CFR?
In which cases is it advisable to use the CIF Incoterms 2020 delivery terms:
- maritime trade;
- the buyer does not want to take out insurance;
- the goods are not expensive or fragile;
- the seller has favorable insurance conditions.
If the buyer seeks to get “minimum hassle” – it is more profitable to choose CIF. If he wants more control and at least minimal insurance – it is more advisable to negotiate about CFR.
If the seller has experience in international transportation and logistics in general, then CFR delivery terms will suit him. Especially if he wants to have more control over the choice of insurance.
To understand which Incoterms rules to choose for deliveries, consult a transport and logistics company. Professionals definitely know all the nuances of international transportation formats. And in order not to organize logistics yourself, you can completely entrust this to experienced logisticians. Their full range of services includes not only the actual transportation, but also the preparation of all documentation and communication with partners and regulatory authorities.
