These two popular business terms seem to be confusing among some people, let us clarify these terms in a simple and understandable way.If you have no clue what these terms are, this article will help you to understand these business terms.
FOB stands for Free on Board, and usually is an agreement between the buyer and supplier of products, under FOB agreement the supplier has to load the goods himself /herself on a ship and ship them to the buyer of the products. In this case, it is the duty of the supplier to clear the goods for export, and the cost as well as risk is clearly divided between the buyer and the supplier when the products are on the ship. In most cases, for FOB agreement, the details of the port and the ship have to be discussed and agreed by the buyer and the supplier of the goods.
CIF stands for Cost, Insurance, and Freight. Under CIF agreement, the supplier usually has to pay all the costs along with freight to bring the goods to destination port. However when products are loaded on the ship, the risk gets transferred on to the buyer of products. Also for CIF, the insurance of the products must be paid by the buyer of the products.
Common differences between FOB and CIF
You have already noticed the differences from their definitions above, once goods have been loaded on to the ship; they become a risk of the buyer in case of FOB. However, in case of CIF, the supplier not only brings goods to the port of destination, he also has to procure and pay for insurance against buyer’s risk of loss or damage to the products on the ship during transit.
To be honest, CIF makes sense when the freight (products) volume is low. Because for small volume of products, it’s very convenient for supplier to handle and make sure nothing will happen to the products during transit and insurance issues. For small volume also becomes very reasonable to use freight company like DHL, UPS or TNT, these companies ensures the safety of products to the supplier during transit to buyer of products.
When freight (products) volume increases, CIF becomes not a good option and can cause a lot of difficulties and this is when most suppliers tend to use FOB. This doesn’t mean CIF is not good, the two business term applies on different situation as explained in this article.