When a foreign buyer asks for your price, the first follow-up question is nearly always: is that FOB or CIF? These three-letter terms are called Incoterms. They decide who pays for transport, who arranges insurance, and at what exact point the goods stop being your responsibility.
Quoting the wrong term, or not understanding the one you quoted, is one of the quickest ways for a new exporter to lose the profit on an order. This guide covers the terms you will actually use.
What are Incoterms?
Incoterms are a set of standard trade terms published by the International Chamber of Commerce. The current edition is Incoterms 2020, which has 11 terms. Each one answers three questions: who arranges and pays for each leg of the journey, where the risk of loss or damage moves from seller to buyer, and who handles export and import clearance.
Incoterms do not cover the price itself, the payment method, or when ownership of the goods changes hands. Those are agreed separately in your contract.
FOB: Free On Board
Under FOB, the seller brings the goods to the port, clears them for export and loads them on the ship named by the buyer. Once the goods are on board, the risk passes to the buyer. The buyer pays the ocean freight, the insurance and all costs at the destination.
A quote reads like this: USD 2,400 per ton FOB Nhava Sheva. The port named is the port of loading in your country.
FOB is the most common choice for new Indian exporters. Your costs are all inside India and easy to calculate, and you do not have to predict international freight rates.
CIF: Cost, Insurance and Freight
Under CIF, the seller does everything in FOB and also pays the ocean freight and a minimum level of marine insurance up to the destination port. A quote reads: USD 2,650 per ton CIF Jebel Ali. Here the port named is the destination.
One point surprises many beginners. Even though the seller pays the freight and insurance, the risk still passes to the buyer when the goods are loaded on the ship at the origin port. If cargo is damaged at sea, the buyer makes the claim on the insurance policy the seller bought.
Buyers often prefer CIF because they get one landed price. For the exporter, it means you must get accurate freight and insurance quotes before sending your offer.
Other terms you will hear
You do not need all 11 terms on day one, but these come up regularly.
- EXW (Ex Works): the buyer collects from your premises and handles everything after that, including export clearance
- FCA (Free Carrier): you hand the goods, cleared for export, to the carrier the buyer names; widely used for container and air shipments
- CFR (Cost and Freight): like CIF, but the seller does not buy insurance
- CIP (Carriage and Insurance Paid To): similar to CIF but for any mode of transport, with a higher level of insurance cover
- DAP (Delivered At Place): you deliver to a named place in the buyer's country; the buyer handles import clearance and duty
- DDP (Delivered Duty Paid): you deliver to the buyer's door and pay import duty too; the most responsibility for the seller
How to turn a FOB price into a CIF price
Start with your FOB price, which includes the product cost, packing, inland transport, port and customs agent charges, and your margin. Then add the ocean freight to the destination port and the insurance premium.
As a simple example, suppose your FOB value for a container is USD 20,000. Your freight forwarder quotes USD 1,500 to the destination port, and insurance costs USD 60. Your CIF price is USD 21,560. Always get the freight quote in writing and check how long it stays valid, because rates change often.
Which term should a new exporter use?
Quote FOB by default. It keeps your responsibility inside India and protects you from freight swings. Offer CIF when the buyer asks for it and you have a reliable freight forwarder. Be careful with DAP and DDP until you have experience, because delays, duties and local charges in a country you do not know can wipe out your margin.
Whichever term you choose, write it in full on the quotation and invoice, including the named port and the edition: for example, FOB Nhava Sheva, Incoterms 2020.
This article is general information for readers starting out. Rules, fees and procedures change, so confirm the current requirements with the relevant authority, your bank or a qualified adviser before acting.