Trading alone is already a complex industry – what more if you’ll delve into the world of international trading? Don’t worry. We here at Winsell Promotions got you!
In this guide, we will talk about everything you need and want to learn about trading terms so you don’t get lost in the journey you will be embarking on!
We’ll discuss a few of the most common and most used terms in trading, categorize different methods and ways of trading, and even help you decide which is best for you and your business!
What is Incoterm?
Incoterm is really an abbreviation for International Commercial Terms, a series of regulations defining the obligations and responsibilities of buyers and sellers worldwide.
In a more superficial sense, incoterm is like the rulebook regarding sourcing. Without it, your sourcing procedure would be chaotic; there wouldn’t be anything to equal everything.
But why is understanding incoterm important? Let’s look into a few reasons why being aware of what incoterm benefits you and your business – for both sellers and buyers.
Why Understanding Incoterms is Important
Understanding incoterms and the rules and regulations behind them is vital because it equips sellers and buyers with the knowledge of costs, risks, obligations, and even successes attached to each practice.
Imagine a road without traffic signs and obligations, would there be organization? No – people will be frantic! They will do what they want, whenever and wherever they are.
So, having a good understanding and using incoterms can save you a lot of stress, time, money, and effort whenever you are sourcing products around the globe.
The processes, methodologies, and flow of transactions are streamlined and carefully sought-after by businesses worldwide. It’s simply a known process for organizations and conglomerates in the supplication and manufacturing industry – no question about that.
You don’t have to ask about specific details like what will happen, where it will go, and how the payment will be. Everything is covered and is streamlined to perfection.
The main benefit of incoterms is to equip businesses and corporations with knowledge about specific processes and methods without needing to explain them. Incoterms are shared by suppliers, manufacturers, and receivers from all around the globe. When you say a term, it’s easily understood and translated.
The rules will be kept and identified, and there’ll be less room for explanation and accidents along the way.
NOTE: This means that the communication between 2 parties will be faster and more urgent.
Lastly, transactions will be a lot faster. Basing it from the first two benefits, standardized and more accessible communication processes will go a long way in the art of trading and sourcing. You’ll be able to get information as quickly as possible without the need to explain or search it.
This is the primary reason why understanding incoterms is a viable tool in sourcing. So, before starting with it, read our comprehensive guide on the different incoterm rules in the book!
What Do Incoterms Cover?
The International Chamber of Commerce identifies incoterms as the “bible” of international commercial trading. Therefore, it covers a set of ground rules and factors, and by the book, these are:
Obligations shall be set by either the seller or the buyer, and the goods’ transportation or freight will be discussed.
Costs, which include the packaging, delivery, and movement, will be made either to the buyer or the seller, depending on the term of the contract.
Lastly, risks would be where the seller will deliver the goods, which will be transported from us to our buyer, regardless of the geographical rules and restrictions, which of course, will be part of the terms.
Don’t confuse yourself – here’s the rulebook for the Incoterms straight from the ICC!
The Most Common Incoterm Rules and Methods
In total, there are about 11 different incoterm rules in the book. Still, for the most part, we will be focusing on just a few of them – a few which are the most used, especially when dealing with Chinese manufacturing companies and suppliers.
NOTE: These different incoterm rules have their benefits and advantages, as well as their cons and drawbacks. We’ll be listing all of these down, so you don’t have to worry about searching all of them!
FOB or Free On Board
Free on Board is the rule that indicates that either the buyer or the seller will be liable for the goods that will be faulted or damaged during shipping.
FOB destination is when the seller is at the risk of loss unless the goods are to be delivered in pristine condition, while FOB origin means that the buyer is the one put at risk.
When the supplier or manufacturer bills you at a FOB price, the price of the goods on board is included, and therefore, the quote will be final.
FCA or Free Carrier
Free Carrier, more commonly referred to as FCA, is the type of shipping where the seller delivers the goods from their origin point to the port of origin (country port) arranged by the buyer.
In this rule, all risks following the goods will be transferred to the buyer as soon as the seller releases the goods.
It’s a no-touch, no-reliability type of thing or when the seller has delivered the goods to a specific location or carriage that the buyer has nominated.
NOTE: When the seller has successfully brought the goods to a region the buyer nominated, they’re free from all risks. But, the seller will and should be responsible for clearing the goods in customs.
CIF or Cost, Insurance, and Freight
This type of shipping agreement explains that the seller will cover the costs, insurance, charges, and freight of the buyer while the cargo is in transit. Then, these goods will be sent straight to the port named in the sales contract, and until the goods are delivered to the warehouse of destination, the seller carries the load.
However, when it reaches the port and after it has been cleared out in customs, the seller would not be affected by any anomalies.
This means that the seller will be shouldered all surcharges, hidden fees, and fees relating to the transport before the landing at the buyer’s port.
This type of shipment refers to the seller’s responsibility for all the risks, fees, and charges involved when transporting it from the origin port until it reaches the destination in the sales contract. The only time the risk is transferred from the seller to the buyer is when the goods are readily available for the buyer – or when it lands in the region where the final destination is.
This is problematic for the seller in most cases because several nations have bureaucratic and complicated importing clearance procedures.
our company incoterm is mostly DDP , pls click here to learn more
EXW or Ex Works
If DDP is problematic to the seller, then EXW or Ex Works is the type of shipping procedure that is somewhat heavy on the shoulders of the buyer.
In this rule, the buyer will be held responsible for the shipment once it leaves the seller’s premises. The buyer will:
- Pay for the cargo and freight
- Insurances of the goods
- Loading of the goods in different vehicles
This is a problematic approach in bordering countries because of some borders’ savage checking and assessment procedures.
CPT or Carriage Paid To
This incoterm rule states that the seller will be delivering the goods at their expense to a person, carrier, or a third-party organization nominated by the seller. For this rule, the seller will be the one to assume all risks involved, including loss and mishandling, until the goods are in the care of the nominated party of the buyer.
It’s worth noting that the seller is not required to ensure the goods in this type of shipment. The insurance will be dependent on the decision of the buyer instead. In multi-carrier settings, the costs and risks will transfer to the buyer after the delivery to the first carrier, which the seller will nominate.
DPU or Delivered at Place Unloaded
Delivered at Place Unloaded, or DPU is a rule requiring the seller to deliver the goods at the seller’s expense. Sellers are going to be the ones responsible for the arrangement of the carriage, delivery of goods, as well as unloading.
This only rule requires sellers to unload the goods and complete the delivery. Buyers will be responsible for any clearance in the importation, as well as taxes and charges involved when it lands at the destination port.
NOTE: For this rule, no restrictions are set for the type of arrangement or place. It can be anywhere from a hub, a warehouse, or a depot. Whatever target location the buyer will nominate, it will be recognized.
FAS or Free Alongside Ship
The FAS or the Free Alongside Ship is the rule that puts the seller responsible for arranging the goods that are to be delivered at a specific port, besides a ship for easier transfers. This means the goods are placed beside a vessel at a named departure port.
The buyer’s advantage would be that it will be delivered right next to the ship or the transport of the buyer, cleared of export.
The seller’s advantage would be the unreliability once it reaches the destination or when the goods are beside the ship named by the buyer.
FAS is one of the most straightforward and most-straightforward transactions as it is a two-way path.
CFR or Cost and Freight
Last, and most definitely not least, is the CFR or Cost and Freight. This rule states that the seller must arrange the carriage of goods by sea to a port, providing the buyer with all necessary documents to get them from the carrier.
If you look at it, you’ll notice it’s closely similar to CIF or Cost, Insurance, and Freight. However, they’re not. The difference lies in insurance. In CFR, sellers are required to pay for shipping, excluding marine insurance, but in CIF, the seller shall partake in insurance by taking out an amount for the protection of the goods during their travel by sea.
Now that you’re learned all this knowledge, the only thing missing is for you to know the exact quote you’ll be getting!
And here with us at Winsell Promotions, we will give you everything you need!