There are advantages and disadvantages for both parties using either arrangement. With CIF, the seller has the opportunity to mark up the cost of transit and insurance effectively making the transaction of the sale more profitable.
They can also choose the shipping arrangement of their choice and may not look for the best deal if the cost is being passed on. The main disadvantage for the purchaser is the potentially higher cost, but they may be willing to trade this off in exchange for not having to concern themselves with shipping quotes, paperwork, customs and tax.
If the seller is used to CIF, then they will likely have more experience with shipping than the buyer. The main disadvantage of FOB is time. If your seller is willing to do either, ask for both the FOB and CIF prices to decide which option will be most cost effective for you. Make sure you know this upfront so there are no surprises at the end. Also, ask the seller if the FOB price calculation or CIF figure includes docking fees and customs fees that need to be paid before the goods are released.
Know what the costs are so you have the full picture on costs. FOB Origin means that the buyer assumes the title of the goods at the point of origin. The moment that the shipper loads the goods onto the freight carrier, the buyer is responsible for the goods. FOB Destination means that the buyer assumes the title of goods at the point of destination, meaning the shipper owns the goods while in transit. Freight Collect means that the buyer is responsible for the freight charges; this is more often the case.
Freight Prepaid means the seller has paid for the charges. This means that the buyer assumes ownership and responsibility for the goods once they leave their originating point.
In this case, the FOB process is as follows:. FOB is usually the most cost-effective option for buyers. Buyers also have more control over the freight timing and cost, because they are able to choose their freight forwarder. If anything happens to the goods, they hold the title and responsibility, so they can better access information and solve concerns.
New importers are not recommended to use FOB because buyers must retain more liability for the goods while in shipment. This means that the seller is responsible for risk and insurance costs until the goods reach their point of destination with the buyer. In this way, sellers are responsible for everything involved with shipping. When you buy or sell goods across national boundaries, you and the other party must have a clear understanding of the terms for moving those goods to their destination.
Each type of agreement specifies which party is responsible for the goods and the point at which responsibility transfers from the seller to the buyer.
With an FOB shipment, responsibility and liability transfer from seller to buyer when the shipment reaches the port or other facility designated as the point of origin. With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer. The purpose of this system is to facilitate orderly international trade by providing contract models that are easily identified across language barriers. Each specifies which party is responsible for goods in transit, what insurance is required and who pays freight charges.
The shift of responsibility from seller to buyer is considered delivery even though the goods may still be in transit.
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