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.
CIF and FOB play pivotal roles in today’s world.
- CIF (Cost, Insurance, and Freight) includes the cost of goods, insurance, and all transportation charges to the destination port, while FOB (Free on Board) covers only the cost of goods and transportation to the departure port.
- Under CIF terms, the seller assumes responsibility for goods until they reach the destination port. In contrast, under FOB terms, the buyer takes responsibility once the goods are loaded onto the shipping vessel.
- CIF leads to higher overall costs for the buyer, including insurance and additional transportation expenses.
CIF vs FOB
The 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 shipping agreement 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.
|Parameters of Comparison||CIF||FOB|
|Full forms||Cost, Insurance, and Freight||Free on Board|
|Responsibility of Seller||The seller’s responsibility continues through and through, and he is also 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 the seller signs.|
|Risks of Damages||The seller bears the loss.||The buyer bears losses.|
What is CIF?
It stands for Cost, Insurance, and Freight. If you look at the name, several aspects governing this shipping agreement become quite clear.
Here, the shipping costs are borne by the seller rather than the buyer, which makes it so expensive. A lot of the time, the seller uses a forwarder.
This is a scheme to raise his profit margins as the forwarder. He uses the seller’s choice and can easily opt for the expensive one.
The second word is Insurance, even if you are a little worried about the costs you will incur on availing of this shipping agreement. The insurance policy might change your mind to an extent.
The seller signs an insurance contract with an almost 100% insurance coverage policy. However, it is pertinent to note that sometimes the buyer.
You 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 seller’s responsibility continues through and through, and he is also 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 has to find and book a ship that will transport and deliver his goods.
Even though one can save a lot on transportation costs, one should ponder if this is the agreement 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 are extinguished.
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 off the buyer’s shoulders and entrusts it upon the seller, in FOB, the buyer’s responsibilities are several.
- CIF ensures that the seller signs an insurance contract with 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.
- The seller in the case of CIF bears all losses incurred due to damaged products. In contrast, the seller has no responsibility after the goods have boarded the ship and bear no losses either in the case of FOB.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.