Small Business Guide to International Commercial Terms (INCOTERMS)
Incoterms are a series of sales terms used throughout the world
International commercial terms or Incoterms are a series of sales terms that are used by businesses throughout the world. Incoterms are used to make international trade easier. Even though Incoterms are common terms used in global trade and logistics, they are incredibly useful - if not necessary - for small business owners to know.
They are used to divide transaction costs and responsibilities between buyer and seller. Incoterms were introduced in 1936 and they have been updated six times to reflect the developments in international trade.
There are thirteen Incoterms that are used by businesses - large and small - and these thirteen Incoterms are used in four different areas.
- EXW means Ex Works and is followed by a named place, for example EXW Dallas. EXW means the seller's responsibility is to make the goods available at the seller's premises. The seller is not responsible for loading the goods on the vehicle provided by the buyer, who then bears the full cost involved in bringing the goods from there to the desired destination.
Main Carriage Not Paid By Seller
- FCA means Free Carrier and is followed by a named place, for example FCA Brownsville. FCA means the seller fulfills its obligation to deliver when it has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into its charge
- FAS means Free Alongside Ship and is followed by a named port of shipment, for example FAS New York. FAS means the seller is responsible for the cost of transporting and delivering goods alongside a vessel in a port in his country. As the buyer has responsibility for export clearance, it is not a practical incoterm for U.S. exports. FAS should be used only for ocean shipments since risk and responsibility shift from seller to buyer when the goods are placed within the reach of the ship's crane
- FOB means Free On Board and is followed by the named port of shipment, for example FOB Baltimore. With FOB the goods are placed on board the ship by the seller at a port of shipment named in the sales agreement. The risk of loss of or damage to the goods is transferred to the buyer when the goods pass the ship's rail, i.e. off the dock and placed on the ship. The seller pays the cost of loading the goods.
Main Carriage Paid By Seller
- CFR means Cost and Freight and is followed by a named port of destination, for example CFR Sydney. CFR requires the seller to pay the costs and freight necessary to bring the goods to the named destination, but the risk of loss or damage to the goods, as well as any cost increases, are transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. Insurance is the buyer's responsibility
- CIF means Cost, Insurance and Freight and is followed by a named port of destination, for example CIF Miami. CIF is similar to CFR with the additional requirement that the seller purchases insurance against the risk of loss or damage to goods. The seller must pay the premium. Insurance is important in international shipping, more than domestic US shipping, because U.S. laws generally hold a common carrier to be liable for lost or damaged goods
- CPT means Carried Paid To and is followed by a named place of destination, for example CPT Kansas City. CPT means that the seller must pay the freight for the carriage of the goods to the named destination. The risk of loss or damage to the goods and any cost increases transfers from the seller to the buyer when the goods have been delivered to the custody of the first carrier, and not at the ship's rail
- CIP means Carriage And Insurance Paid To and is followed by a named place of destination, for example CIP Boston. CIP has the same incoterm meaning as CPT, but in addition the seller pays for the insurance against loss of damage.
- DAF means Delivered At Frontier and is followed by a named place, for example DAF El Paso. DAF means that the seller’s responsibility is complete when the goods have arrived at the frontier but before the customs border of the country named in the sales contract. This buyer is responsible for the cost of the goods to clear customs
- DES means Delivered Ex Ship and is followed by a named port of destination, for example DES Vancouver. DES means the seller shall make the goods available to the buyer on board the ship at the place named in the sales contract. The cost of unloading the goods and associated customs duties are paid by the buyer
- DEQ means Delivered Ex Quay and is followed by a named port of destination, for example DEQ Los Angeles. DEQ means the seller has agreed to make the goods available to the buyer on the quay at the place named in the sales contract
- DDU means Delivered Duty Unpaid and is followed by a named place of destination, for example DDU Topeka. The seller has to bear the costs involved in shipping the goods as well as the costs and risks of carrying out customs formalities. The buyer pays the duty and has to pay any additional costs caused by its failure to clear the goods for import in time
- DDP means Delivered Duty Paid and is followed by a named place of destination, for example DDP Bakersfield. The seller has to pay the costs involved in shipping the goods as well as the costs and risks of carrying out customs formalities. The seller pays the duty and the buyer has to pay any additional costs caused by its failure to clear the goods for import in time. DDP should not be used if the seller is unable to obtain an import license
Article updated by Supply Chain/Logistics Expert Gary W. Marion.