If you offer international delivery or export goods overseas as a seller, you’ll need to know the most common shipping terms used to transport items abroad. Failing to fully understand what a shipping term means can cause a lot of issues for you and your business, and could even lead to delays and disputes. From insurance when exporting products internationally to understanding who is responsible for international delivery, knowing exactly what a shipping term means and is used for will help you avoid any issues now and in the future. In this complete guide, we’re going to explain what shipping terms are, why they’re used and 12 Incoterms you should know.
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Shipping terms, also known as incoterms, are three-letter abbreviations used when exporting goods overseas. Created by the International Chamber of Commerce in 1939, incoterms (International Commercial Terms) make it easier for businesses to communicate effectively when exporting goods around the world. Since international trade will often involve language barriers, shipping terms break down barriers to communication and help minimize the chance of miscommunication between sellers and freight companies.
Shipping terms also act as a contract between two parties, as they clearly outline who is responsible for each task and what is expected of them. So, incoterms will tell everyone involved with a delivery who needs to cover the cost of exporting goods abroad. This may involve customs clearance, duties, and freight. In some cases, the seller will cover all costs, but at other times it will be the buyer. Put simply, shipping terms refer to three things:
If this is the first time you’ve come across the term ‘shipping terms’ as a small or large business, don’t panic. We’re going to clearly explain every shipping term you’ll ever need to know! Once you’ve mastered these trading practices, you’ll feel more confident when exporting goods around the world.
Trading overseas is made easier when using incoterms. As long as both sellers, freight companies, and buyers understand what incoterms are, what they represent, and how to use them correctly, exporting goods and trading on a global scale is a simple and straightforward process. From the distribution center to the shipping recipient, disputes and disruptions to the supply chain can be avoided when using shipping terms correctly. The key to a successful international business is a steady flow of cash, stock ready to ship, and excellent customer service, and incoterms can help sellers achieve this.
If you want to have an edge over your competitors, incoterms could be the answer. When shipping terms are effectively used, they can ensure goods are delivered on time and payment is received. This gives businesses involved in the entire overseas supply chain a competitive advantage. Should a single government be able to change shipping terms and regulations, this could encourage bribery and unfair business practices. But, by everyone using a standardized set of terms and terminology, penalties, fines, and criminal activity can be avoided. 1
While regular business terms and phrases can often be misunderstood between sellers and buyers, language barriers can also cause communication issues when you start trading overseas. That’s why using standardized terminologies such as incoterms is best for carriers and buyers. By using the same terms when exporting goods abroad and trading internationally, there is no room left for error or confusion about each party’s role, responsibility, and management. So sending goods from one destination to another, whether it’s within the same continent or thousands of miles overseas, shipping terms can give all parties involved complete peace of mind.
If you’re completely new to the world of exporting overseas, read our ultimate guide: How to Start An Export Business
So, let’s look at 12 of the most popular Incoterms in global trade and what they actually mean and represent.
This shipping term tells the seller to deliver the products to a certain destination, to the carrier chosen by the buyer. This destination will determine the loading and unloading requirements in the first transport. If delivery is made on the premises of the seller, then they are liable for the load. However, if the delivery takes place elsewhere, then the buyer is responsible for unloading the shipment. This also lets both parties know that the seller will take care of the export customs clearance. Since a new rule came into force in 2010, the buyer can now instruct its carrier to issue a bill of landing with an on-board notation to the seller so that they may satisfy the terms of a letter of credit. 2
If you see this incoterm, it means that the seller will deliver to their own warehouse or factory for the buyer to pick up. The seller does not load the goods for the buyer or is involved in export clearance. The buyer is therefore responsible for all expenses and risks involved.
This abbreviation refers to risk and responsibility. The seller will deliver the goods unloaded in the country of destination, in a port or airport for example. Then transportation risk is passed from the seller to the buyer as delivery is made and completed. The export customs clearance is handled by the seller, but import customs clearance and any tariffs are paid by the buyer.
CPT means that the seller contracts and pays for transportation to the delivery destination in the buyer’s country. When the goods are received by the first carrier in the chain, the seller is no longer responsible for the items and all risk is passed over to the buyer. The export customs clearance is completed and handled by the seller.
In the same way, CPT refers to the obligations to the seller, this incoterm means that the seller is also responsible for transport and shipping insurance. The seller is now also responsible for purchasing a higher level of insurance coverage, at least 110% of the value of goods as detailed in Clause A of the Institute of Cargo Clauses. 2
The seller must deliver the goods to the country specified by the buyer, and the items must be ready to be unloaded in a place other than a terminal or transport infrastructure. The risk of transporting the goods passes from the seller to the buyer once delivery has been made. The buyer pays import customs clearance and tariffs, but the seller completes export customs clearance.
This shipping term means that the seller will deliver the goods, ready for unloading, at the place of destination requested by the buyer. This is usually a factory or warehouse owned by the buyer. All risks and costs, including customs fees such as clearance of export and import, are handled by the seller.
FAS means that the seller is obliged to deliver the goods, alongside a vessel at the port of destination. Once delivered, all costs and associated risks are passed over to the buyer, although the seller handles customs clearance.
When shipping goods overseas, FOB refers to the responsibility of the seller to deliver goods on board the ship, at the port of shipment. The buyer chooses to ship and pay for freight. The transportation risk will move from the seller to the buyer once the goods are delivered and are safely onboard the ship. With FOB, export customs clearance is handled by the seller.
If you use CFR, this means that the seller is responsible for freight to the port of destination. But, once the goods are loaded onto the ship at the shipment port, the risk of loss or damage to the goods moves from the seller to the buyer. Again, responsibility for export customs clearance lies with the seller.
Going back to CFR, the same obligations apply to the seller when using the shipping term CIF. The seller must also provide and pay for transport insurance to safeguard the goods, but insurance coverage only needs to be at a basic level. 3
LCL is a common shipping term used when exporting overseas and to a named port. Small ocean freight shipment is transported using this code when the shipper doesn’t contract for a full container due to the low quantity of goods. In this case, a freight forwarder may create a consolidation by putting together multiple LCL shipments before gating in at the container yard at the place of destination or named port. 4
While international sellers should be aware of the majority of shipping terms, you may not need to use all of them while exporting goods overseas. So, which Incoterms will an online seller trading internationally need to use?
The most commonly used shipping terms:
If you’re thinking of exporting goods overseas, read our latest article on: Benefits of exporting for small businesses
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