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This is part two in a series on export procedures and documentation. Today, we’re going to talk about some of the most common terms in the international supply chain—freight incoterms—and outline what you need to know about them.
What Are Incoterms and Why Do They Matter?
Incoterms is a shortened version of “International Commercial Terms.” They are a series of codes used to define the point at which the goods become the buyer’s responsibility.
Choosing the right incoterms is critical as a wrong choice could inflate costs and delay your shipment. It’s vital to consider your incoterms before negotiating your sales contract to avoid any issues.
For example, some incoterms have an impact on shipping costs. EXW indicates the need for additional shipping services to get your goods to and from the port, so using this term might not always be to your advantage.
Incoterms also do not cover who’s responsible for insuring the goods, which is usually a separate cost for the buyer.
Additionally, if you have a letter of credit, it limits the use of certain terms or at least merits some consideration because there are trust issues in play. The four C-terms are generally best here, as they assign responsibility for insuring the cargo and therefore reduce your risk.
The Role Of Licensed Customs Brokers In Facilitating International Trade
- EXW (ex works) – seller arranges the entire shipment from point to point and is paid before pickup.
- FCA (free carrier) – seller arranges everything to the buyer’s country, including customs and trucking within the destination country, but the buyer takes over getting the goods to their final destination.
- FOB (free on board) – applies only to goods traveling by sea. Free means the supplier must deliver goods to a specific locale where they will be transferred to the ship. On board indicates it’s on the ship. The seller’s responsibility ends as soon as it’s on board, at which point it transfers to the buyer.
- CIP and CIF (carriage and insurance paid to) – only recommended when a letter of credit is involved. CIF relates only to sea freight and means responsibility shifts to the buyer at the seaport of origin.
- DPU (delivered at place unloaded) – the seller deals with all charges at the export country plus international transit, and the buyer takes on the rest.
- DAP (delivered at place) – seller is responsible for everything except import customs.
- DDP (delivered duty paid) – seller arranges everything, including import customs.
Export Shipments Involving Letters of Credit
If your transaction includes a letter of credit, you will need to provide the bank with various documents, including an air waybill or bill of lading.
Letters of credit are used when there is limited trust between you and the purchaser. You are paid before the buyer picks up the goods, which rules out the EXW incoterm, and you won’t use F terms because they require trust. For example, if the buyer cancels a shipment in transit, you won’t have a bill of lading to give to the bank.
In the case of D terms, the shipper is responsible for all transit costs, so again, not ideal in a letter of credit scenario. That leaves C terms as the best option.
If you’re an exporter or just launching an export business, be sure to read all three parts of our export procedures series. Partnering with an experienced international 3PL like DTS always puts you at an advantage. Reach out today to find out how we can help.