FCA vs CIF
The difference between FCA and CIF INCOTERM lies in segregating the risks and responsibilities of transportation. The risk and responsibilities of both FCA and CIF INCOTERM also differ, with more responsibilities comes more risk to the buyer or the seller. When securing an international goods sale, both parties need to be well aware of what the INCOTERM implies in terms of the risk involved.
An international sale made with FCA INCOTERM favors the seller because the seller has to only deliver the goods to a designated location, determined by the buyer. Whereas in CIF INCOTERM, the seller is obligated to arrange for the contract of carriage up to the buyer’s designated port.
Here we will provide a simple table for you that broadly gives you an idea the difference between FCA and CIF terms.
|Responsibilities||FCA Term||CIF Term|
|A) Delivery||At the buyer’s named location (at Port of Loading)|
– either placed at the disposal of the buyer to load or loaded to the means of transportation provided
|At the buyer’s named port (at Port of Discharge)|
– Cargo is placed onboard the vessel
|B) Export Customs Clearance(licenses, permits, and other formalities)||Seller||Seller|
|C) Contract of Carriage(Freight Arrangement)||Buyer||Seller|
|D) Transfer of Risk||The risk is transferred when the cargo is delivered as ascribed in A||The risk is transferred when the cargo is delivered as ascribed in A|
For a detailed information about FCA and CIF, we implore you to read on.
What is FCA INCOTERM
FCA, or “Free Carrier”, can be applied irrespective of what form of transportation is used. Although the FCA INCOTERM is less used in containerized freight arrangements.
Fundamentally, an FCA term shipment means that the seller only has to deliver the goods at a location named by the buyer. At this point, the cargo has not crossed any country borders yet.
In an FCA term, the customs clearance and partner governing agency clearances are the responsibilities of the seller.
This also means that any duty, levy, sales tax, licensing costs, or other permit-related costs are the sellers to bear. Should there be any delays in transportation due to problems from the export clearance, it is clearly stated that the seller is solely responsible for any consequential damages and costs.
The point of delivery as described above is also the point where the risk of transportation is delivered.
Once the buyer takes delivery, the sales contract is considered finished.
However, one key component required is that the seller also has to ensure that the importing country’s customs official receives all the necessary documentation and certifications required to clear the importing goods.
Therefore, although the transfer of risk happens at the point of delivery, the seller is still obligated to prepare any documents, permits, certificates that the importer considers necessary.
When it comes to matters relating to packaging, labeling, and marking, it is also the seller’s duty to prepare the cargo in a way that facilitates the transportation process.
Labelling and markings are pertinent and the buyer requires it for various reasons, it could be for the purpose of:-
- Fulfilling any import clearance formalities
- Facilitating cargo identification for reselling or redistribution
When is FCA Preferred Over CIF
The reason why FCA is preferred over CIF is that the buyer wants some level of control over either: –
- The packaging/repackaging of the cargo purchased
- The cargo carriage arrangement
For example, a buyer may purchase goods from multiple sellers located in the same country of origin.
To save on transportation costs, the buyer may opt to consolidate all the goods purchased and arrange the transportation under one contract of carriage.
If the cargo purchased are loose cargoes, meaning that the cargo would not need a full container’s space to deliver, the buyer can consolidate all other goods and export the goods using one container.
For other similar reasons such as the ones we described above, the buyer would be better off with using an FCA term over a CIF term.
After all, sellers would consider INCOTERMs when pricing the goods sold. Ultimately it is the buyer that takes on the cost of transportation, if the buyer can save some cost from transportation, the price of goods sold would be reduced.
What is CIF INCOTERM
‘Cost, Insurance and Freight’, or CIF as an abbreviation is a transportation shipping term, the name in itself provides hints as to the responsibilities of the seller is to take on the cost of insurance and logistics freight. Let’s elaborate further.
In a transport arrangement under the CIF term, the seller is responsible for every aspect of the transportation until the cargo is placed on board the vessel.
The seller arranges the contract of carriage, this means that the carriage contract is issued to the seller, instead of the buyer. We will explore this key detail later on.
Numerous writings describe in detail what CIF INCOTERM is, but in this article, we like to emphasize the inherent difference in the transfer of the transportation risk.
Sellers and contract carriers are two different entities, when the seller appoints a carrier to undergo the carriage of goods, the possession of the goods is transferred to the carrier firstly, instead of the buyer.
This implies that the seller can no longer be in control over the safety of the goods in transit, therefore, they no longer can physically be responsible for the transportation risk.
In the International Chambers of Commerce detailed description, the transfer of risk occurs once the cargo is placed on board the vessel.
Despite that, the moment the cargo is shipped into the port terminal, the cargo is in possession of the carrier.
Therefore there is a small gap of ambiguity between the time when the cargo is in the port terminal, and when the cargo is on board the vessel.
This is where the buyer requires the seller to purchase cargo insurance to cover any unfortunate circumstances that cause cargo loss or damages.
If the type of cargo insurance is not specified by the buyer, the seller is only obligated to buy a marine cargo insurance institute clause (C), which is the lowest coverage available.
The buyers have the right to determine what sort of cargo insurance the seller has to buy.
When is CIF Preferred over FCA?
The approach to this question lies in the overall cost of transportation.
In other words,
Would the cost of transportation be lower and safer if the seller arranges the contract of carriage?
If the answer to the question above is a reassuring “yes”, then there is no incentive for the buyer to arrange the contract of carriage.
However from the perspective of the seller, the underlying question would be: –
Why would I want to bear the transportation cost and risk on behalf of my clients?
In a globalized market, the seller is not only competing with manufacturers from its own country to supply or sell, but also it is competing with other countries as well.
The seller can be competitive if they offer to sell goods and bear the transportation cost, which makes their products more favorable.
Another reason why the transportation can be arranged under CIF terms is that the seller may have preferable freight contracts with the shipping/airline operators. It could be in terms of lower freight charges, preferable freight spaces, or even longer payment terms.
In either case, it is much more beneficial to both the buyer and sellers that the cargo transportation is arranged with CIF terms if the above circumstances apply.
There are a myriad of INCOTERMS that the International Chamber of Commerce prepared to facilitate global trade.
International buyers and sellers are walking a tightrope to balance between ensuring that the sales contracts are in place and that the transportation risks involved do not burden their business livelihood.
To understand clearly what INCOTERM suits your company best, whether you are a buyer or seller, is an important step to ensure both business sustainability and profitability.