The expansion of trade and commerce has unlocked a window of possibilities. It is the mother that led to discoveries as well as war. Decades have passed by, but the spirit of business only glows brighter. Our lives are in a way entwined with it, and we must enhance our understanding of the concepts of CIF and FOB, which play a pivotal role in today’s world.
CIF vs FOB
The main difference between CIF and FOB is that while both happen to be shipping agreements of an international level governing the transportation of goods from the seller to the buyer, the former is a shipping agreement that is quite expensive as the seller charges a price for the forwarder which in turn increases his profits, the latter governs the aspects that ensue after the goods are shipped.
CIF is a term that one in the commercial world must be acquainted with. It stands for Cost, Insurance, and Freight. It is often regarded as an expensive agreement. This is because, in this shipping agreement, the seller charges a price for the forwarder, which in turn increases his profits.
On the other hand, FOB is not very expensive from a buying point of view. It stands for Free on Board. This is a shipping agreement that governs the aspects that ensue after the goods are shipped. In other words, these contracts relieve the seller from his liabilities after the goods have been shipped.
Comparison Table Between CIF and FOB
| Parameters of Comparison | CIF | FOB |
| Full forms | Cost, Insurance, and Freight | Free on Board |
| Responsibility of Seller | The responsibility of the seller continues through and through, and he is also the one responsible for finding a ship. | In this case, the responsibility of the seller comes to a halt the moment the items are loaded or shipped. |
| Shipping | The seller is the one who is entrusted with the responsibility of booking a ship to deliver the goods. | The buyer is the one who is responsible for finding a ship to get his items delivered. |
| Insurance | The seller signs an insurance contract that has an almost 100% insurance coverage policy. | The insurance on products is not a contract that is signed by the seller. |
| Risks of Damages | The loss is borne by the seller. | Losses are borne by the buyer. |
What is CIF?
It stands for Cost, Insurance, and Freight. If you look at the name, several aspects that govern this shipping agreement becomes quite clear. Here, the costs of shipping are borne by the seller rather than the buyer, and this is what makes it so expensive. A lot of the time, the seller uses a forwarder. This is typically a scheme to raise his profit margins as the forwarder that he uses is of the seller’s choice, and he can easily opt for the expensive one.
The second word is Insurance, and even if you are a little worried about the costs that you will incur on availing of this shipping agreement, the insurance policy might change your mind to an extent. The seller here signs an insurance contract that has an almost 100% insurance coverage policy. However, it is pertinent to note that sometimes the buyer may have to pay certain additional charges such as the amount incurred for docking the ship at a port, the fees that are incurred at customs clearance.
The responsibility of the seller continues through and through, and he is also the one responsible for finding a ship. Along with this, the loss of the damaged products is on the seller to be borne.
What is FOB?
This stands for Free on Board. The name gives a slight hint of what the shipping agreement might be like. In this agreement, the responsibility of the seller comes to a complete halt after the goods have been put on the ship and have set sails to be delivered. Thus, this is why it is known as Free on Board because it gives the impression that once the goods are set to be delivered (shipped), the seller is free from all responsibilities.
It is quite popular because it is not as expensive as CIF. Here, the seller cannot use his forwarder, which will raise his profit margin. The buyer himself has to find and book a ship that will transport his goods and deliver them to him.
Even though one can save a lot on the costs of transportation, one should ponder if this is the agreement that they wish to enter into. This is because the buyer is responsible for booking the ship and also ensuring that the goods are delivered to him in one piece. Once the goods board the ship, the seller’s responsibilities extinguish. No insurance policy governs this transaction either. Along with this, the seller has no responsibility after the goods have boarded the ship and bear no losses for damaged products in the case of FOB.
Main Differences Between CIF and FOB
- While CIF is an acronym for Cost, Insurance, and Freight, FOB is the acronym for Free on Board.
- Where CIF takes a considerable degree of the burden of the buyer’s shoulders and entrusts it upon the seller, in FOB, the responsibilities that are undertaken by the buyer are several.
- CIF ensures that the seller here signs an insurance contract that has an almost 100% insurance coverage policy. In contrast, the insurance on products is not a contract that is signed by the seller in the case of FOB.
- The seller is the one who books a ship to ship the ordered items to the buyer in CIF. On the other hand, in FOB, the seller does not assume this responsibility, but the buyer has to fix the ship.
- All losses incurred due to damaged products are borne by the seller in the case of CIF. Whereas the seller has no responsibility after the goods have boarded the ship and bear no losses either in the case of FOB.
Conclusion
It is an undeniable fact that no matter how unrecognizably our society changes years from now, the pillar which buttresses it, that is, the pillar of trade and commerce, will always stand tall. And governing international businesses are international agreements, such as CIF and FOB. The difference between them is that while both happen to be shipping agreements of an international level governing the transportation of goods from the seller to the buyer, the former is a shipping agreement that is quite expensive as the seller charges a price for the forwarder, which in turn increases his profits, the latter governs the aspects that ensue after the goods are shipped.
If you wish to save on the costs of shipping, then FOB might turn out to be a viable option. The aspects of insurance, shipping, and the risks borne in the event of any damages suffered by the goods are much more promising for the buyer in the case of CIF.
References
- https://www.researchgate.net/profile/Soledad-Zignago/publication/267385035_International_Transportation_Costs_Around_the_World_a_New_CIFFoB_rates_Dataset/links/5527ce490cf2779ab78abb8d/International-Transportation-Costs-Around-the-World-a-New-CIF-FoB-rates-Dataset.pdf
- https://www.elgaronline.com/view/edcoll/9781786436146/9781786436146.00019.xml