CIF vs. FOB: What’s the Difference & How to Choose?

Incoterms play a critical role in international trade as they impact sellers’ and buyers’ pricing, shipping, and obligations. Some new buyers often need a clearer understanding of these trading terms. They observe others using FOB (Free On Board) and request FOB prices from their sellers without considering that CIF (Cost, Insurance, and Freight) might be more suitable for their needs. Consequently, sellers provide FOB quotations based on the buyer’s incorrect request and description, leading to communication failures between the two parties.
Typically, CIF and FOB are the most commonly used shipping terms. To help you avoid such issues and use these terms correctly, this article will discuss the differences between FOB and CIF from the following perspectives:

1. What is CIF, and who bears the risk in shipping?
2. What is FOB, and who bears the risk in shipping?
3. What are the differences between CIF and FOB prices?
4. Why do buyers prefer FOB/CIF, and when to use them?

What is CIF, and who bears the risk in shipping?

CIF is an abbreviation for Cost, Insurance, and Freight, which encompasses three types of fees: the cost of goods, freight charges to the designated port in your country, and insurance coverage. When using CIF shipping terms, specify a designated port, such as CIF New York or CIF Los Angeles.
Let’s take CIF New York as an example. In this case, the seller is responsible for paying the sea freight charges and arranging insurance coverage for the goods. They will ship the goods to the Port of New York, and you will take delivery there. At the port, you will be responsible for handling the import customs clearance procedures, paying any applicable import duties, and arranging the transfer of goods from the port to your warehouse.
Regarding the risk of damage or loss, since the seller is arranging the shipping, they bear the responsibility until the goods reach New York. If there is any damage during transit, the seller will assist in communicating with freight forwarders and addressing the issues. Additionally, the seller assists in procuring cargo insurance and provides you with insurance policies. Therefore, if the goods are lost, you can claim with the insurance company.

When negotiating the shipping agreement under CIF delivery terms with the seller, you must clarify the port you will pick up the goods, shipping methods, and costs. The type and amount of Insurance purchased to avoid any unnecessary disputes in the future.

What is FOB, and who bears the risk in shipping?

FOB, which stands for Free On Board, indicates that the sellers are responsible for delivering the goods to the designated seaport in their country. Once the goods have been shown to the port, you, as the buyer, will have your freight forwarder handle all further arrangements, including shipping to your destination, paying the sea freight charges, obtaining Insurance, and managing import customs clearance procedures.
When using FOB shipping terms, you should specify a specific seaport, such as FOB Shenzhen or FOB Shanghai. For instance, FOB Shenzhen means the seller will transport the goods from the factory to the Port of Shenzhen. You will then take over the goods at the port and arrange their shipment to your desired destination in your country.
Regarding the risk, the seller bears responsibility for any damage or loss before the goods arrive at the Port of Shenzhen. However, once the goods are loaded onto the ship, the risk is transferred to you as the buyer. Unlike CIF, where the seller assists with claims, in the case of FOB, you would need to directly contact your freight forwarder or insurance company in case of any damage or loss during shipping.
For example, if the goods are being hoisted onto the ship and accidentally fall into the sea before they are on board, the seller would still be liable for the damage, as the delivery of the goods has not been completed.

Generally, the seller will send the goods to their closest port under FOB delivery terms. If you don’t know it, you can ask the seller and let them quote you the price based on that. For example, a seller in Dongguan will send the goods to the Port of Shenzhen, while a seller in Suzhou will send goods to the Port of Shanghai.

CIF price vs. FOB price

When using CIF or FOB shipping terms, there are several vital aspects that you need to consider:

• The responsibilities of buyers and sellers
• The liability for damage or loss during shipping
• The pricing quotations provided by the seller

These factors represent the primary differences between these two terms. We have already discussed the first two points previously. Now, let’s delve into the differences between CIF and FOB prices, encompassing various expenses.
For instance, you are purchasing a batch of goods from Guangzhou, China, and you plan to ship them to Los Angeles, USA. Generally, products from Guangzhou are exported from the Port of Shenzhen. Hence, the costs involved would be as follows:

• product price: $10,000
• cost from the factory to the Port of Shenzhen: $500
• export customs clearance fees: $300
• sea freight from Port of Shenzhen to Los Angeles: $2,500
• cost of Insurance: $250

FOB price

Under the FOB shipping term, the seller has to arrange trucks to send the goods to the Port of Shenzhen and deal with export customs clearance. They will add these fees to the price you will pay. Thus, the FOB price calculation is as follows:

FOB Shenzhen price = product price + costs from the factory to the port of Shenzhen + export customs clearance fees.

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

CIF price

With CIF shipping terms, except for sending the goods to the Port of Shenzhen and dealing with customs clearance, the seller has to pay the insurance and sea freight to Los Angeles. These fees are also included in the price you should pay. So CIF price calculation can be:

CIF Los Angeles price = FOB Shenzhen price + freight to Los Angeles + insurance

i.e. CIF Los Angeles price = $10,800 + $2500 + $250 = $13,800

CIF freight and Insurance

Regarding freight during the epidemic, it is essential to note that it is subject to real-time updates every week. When estimating freight costs, it is advisable to inquire with the seller or freight forwarder to obtain the latest freight rates.

Additionally, when shipping goods under CIF delivery terms via Less than Container Load (LCL), you may encounter a situation where the Chinese forwarder initially charges you a shallow sea freight rate. You might assume this is the total cost and won’t have to pay further charges. However, the forwarder may charge you again upon picking up the goods at the port.

It is crucial to understand that this is not a scam but a difference in how these freight forwarders calculate LCL shipping costs. For example, suppose you are transporting goods measuring three cubic meters (CBM). In that case, you might receive different prices from three other forwarders. Initially, they may charge you only a portion of the total shipping costs, such as 30% or 10%, or even offer it for free, which varies among different forwarders. Subsequently, they will charge you the remainder of the costs when you pick up the goods at the port in your country. It is important to note that all these fees represent the total shipping costs and must be paid to the forwarders.

Therefore, a low price provided by specific freight forwarders does not necessarily indicate that it is cheap, as you will still need to pay the remaining fees to cover the complete costs.

Regarding Insurance, the seller must purchase minimum insurance coverage for the goods, equivalent to (1+10%) of the CIF price. Therefore, the insurance payment is calculated as Insurance paid = CIF price × 110% × insurance rate. If you desire higher insurance coverage, you must either reach an agreement with the seller or purchase additional Insurance independently.

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Why do buyers prefer FOB/CIF prices, and when to use them?

When making purchases from China, whether by sea or air, the goods must be transported from the factory to a port within China by truck before they can be shipped to your country. However, this process can be challenging. China is a vast country with numerous ports and suppliers in different regions. If you are unfamiliar with China and need more experience importing, arranging transportation from the factory to the port can be a significant inconvenience.

As a result, many buyers prefer to avoid dealing with this task and instead opt for CIF or FOB shipping terms. Under FOB, the Chinese seller can assist in delivering the goods to the designated port within China. You need to know when the goods arrive at the port and arrange for your ship to pick them up on time.

Under CIF, the seller directly ships the goods to the port in your country, and you only need to receive the goods at that port. Both options can save you from the hassle of arranging transportation from the factory to the port.

However, it is essential to note that FOB or CIF may only suit some. If you choose FOB, it is advisable to have a reliable freight forwarder who can handle the shipping process from the port in China to your final destination. Alternatively, if you cannot arrange transportation, request a CIF price from your seller and have them handle the shipping.

Moreover, FOB is a good choice if you need to collect goods from multiple sellers at the same port in China and then ship them together via Less than Container Load (LCL) or Full Container Load (FCL). All your sellers can send the goods to the same designated seaport, where your freight forwarder can collect and load them into a container.

Tacole bag sourcing can assist you in purchasing goods from multiple sellers, consolidating them into a single package, and arranging FOB or CIF shipping on your behalf.

The end

Please comment below if you have any questions after reading this simple guide on the differences between CIF and FOB.

We are Tacole bags sourcing, a leading Chinese sourcing company for loads with rich experience in helping importers buy, customize, and ship products from China at competitive prices. We are devoted to supporting your business with reasonable solutions to any problems. If you need help, please feel free to CONTACT US.