Incoterms: the 12 shipping terms you should know to sell and buy

Incoterms or shipping terms are three-letter abbreviations used in exports. They were created by the International Chamber of Commerce at the beginning of the 20th century to break down the language barriers in these commercial operations and to facilitate communication between importing and exporting companies.

Thus, incoterms act as a contract in which the obligations of each of the companies involved are established. Specifically, the incoterms determine:

  • Who is responsible for organizing the transport and the carrier.

 

  • Who should cover the cost of transportation.

 

  • Where and when the goods will be transferred from the seller to the buyer.

 

When exporting, it is essential to know how these issues work, as well as the commercial documents that must be prepared, the transport documents that are required and the customs documents that are needed.

Specifically, incoterms are very useful because they promote international trade, increase the benefits of transactions and reduce errors:

  • They promote international trade: exports become easier if incoterms are used in negotiations. When the selling company, the buying company and the transport company understand them, exports become a simple and direct action.

 

  • Increase the benefits of transactions: if incoterms are used correctly, this can imply that deliveries and payments are made on time, which is a competitive advantage for all companies involved in that export operation. If all of them are governed by the agreed shipping terms, penalties and fines can be avoided.

 

  • Reduce errors: the language barrier can cause communication problems when negotiating the conditions of exports. On the other hand, if a standardized terminology is used, such as incoterms, all the people involved know what they are talking about. In this way, there is no room for errors and, from the beginning, it is known who is responsible for carrying out each procedure.

 

At Autor Foods we have been carrying out international operations for decades and we guarantee that using it has been one of the keys to becoming professional exporters. For this reason, we want to share everything we know about incoterms, offering you all the information about the 12 shipping terms that you must know to sell and buy. Did you think there were only 11? Well, read to the end.

 

EXW (Ex Works)

EXW is an Incoterm for any mode of transport. The seller fulfills its obligations by having the goods available for the buyer to pick up at its premises or another named place (i.e. factory, warehouse, etc.) on a date agreed upon by both parties or within an agreed-upon timeframe. The seller needs to provide the buyer the information they need to take delivery of the goods at that time. With Ex Works, the buyer bears all risk and costs starting when the goods are made available to the buyer at the seller’s location or other named place until the products are delivered to its location. Seller has no obligation to load the goods or clear them for export.

 

FCA (Free Carrier)

FCA is an Incoterm for any mode of transport. The seller is responsible for either making the goods available at its own premises or at a named place. In either case, the seller is responsible for loading the goods on the buyer’s transport and is responsible for delivery to the port and export clearance including security requirements. Risk transfers once the goods are loaded on the buyer’s transport.

 

FAS (Free Alongside Ship)

FAS is an Incoterm for sea and inland waterway transport. Seller clears the goods for export and delivers them when they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.

 

FOB (Free on Board)

FAS is an Incoterm for sea and inland waterway transport. Seller clears the goods for export and delivers them when they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.

 

CFR (Cost and Freight)                                 

CFR is an Incoterm for sea and inland waterway transport. Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight to the named port of destination. Buyer assumes all risks for the goods from the time the goods have been delivered on board the vessel at the port of shipment.

 

CIF (Cost, Insurance, and Freight)

CIF is an Incoterm for sea and inland waterway transport. Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. The seller is required to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses. Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are on board the vessel at the port of shipment.

 

CPT (Carriage Paid To…)

CPT is an Incoterm for any mode of transport. Seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the international transportation costs associated with delivering goods to the named foreign place of destination. The transfer of risk, on the other hand, transfers from the seller to the buyer as soon as the goods are delivered to the international carrier. That means the buyer assumes the risk of loading the goods on the carrier and during the international transport of the goods.

 

CIP (Carriage and Insurance Paid)

CIP is an Incoterm for any mode of transport. Seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment, at which point risk transfers to the buyer. Seller is responsible for the transportation costs associated with delivering goods and procuring insurance coverage to the named place.

 

DPU  (Delivered at place Unloaded)

DPU is an Incoterm for any mode of transport. Previously named Delivered at Terminal (DAT), this Incoterm has been renamed Delivered at Place Unloaded (DPU) because the buyer and/or seller may want the delivery of goods to occur somewhere other than a terminal. DPU is very similar to DAP except that the seller must pay for unlading the goods. Like DAP, the seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named place, which can be a port or other named location in the foreign destination. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the named country of destination.

 

DAP (Delivered At Place)

DAP is an Incoterm for any mode of transport. Seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named foreign destination not unloaded. DAP means the buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.

 

DDP (Delivered Duty Paid)

DDP is an Incoterm for any mode of transport. The seller bears all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import.

 

Of these 11 incoterms, the most used are EXW, FOB, CFR, CIF. But, didn’t we promise at the beginning that we would reveal the 12 shipping terms you need to know to sell and buy? That’s right, there is one more, although it is not a three-letter acronym. It is a vital concept in exports: trust.

Whether you are the buyer or the seller, you must establish a relationship of absolute trust. To do this, you must show your willingness to negotiate with these incoterms, provide all the necessary information and always be available for queries and doubts that may arise. We guarantee that, in this way, exports will be much easier than you imagine.

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