FOB, CFR and CIF explained for Bangladeshi importers
, 2 minute read, by Mashrur Corporation
Two overseas suppliers quote the same goods at different prices. One is FOB and the other CFR. Until both are converted to the cost of goods landed at your door, the cheaper-looking offer may be the dearer one.
What an Incoterm settles
Incoterms are standard trade terms published by the International Chamber of Commerce. The current edition is Incoterms 2020. Each term fixes three things: who arranges and pays for carriage, who arranges insurance, and the point at which risk of loss passes from seller to buyer. They do not settle ownership or payment terms.
The three sea terms you will see most
- FOB (Free On Board): the seller delivers the goods on board the vessel at the loading port. The buyer pays freight and insurance from there.
- CFR (Cost and Freight): the seller also pays the sea freight to the destination port. The buyer arranges insurance.
- CIF (Cost, Insurance and Freight): the seller pays freight and also buys insurance, which under the rules need only be minimum cover.
Risk passes earlier than many buyers expect
Under all three terms, risk passes to the buyer when the goods are on board the vessel at the port of loading. With CFR and CIF the seller pays the freight, but if the cargo is damaged at sea the loss is the buyer's to claim. That is why your insurance must be in place before the vessel sails.
Why CFR is common in Bangladesh
Importers here generally insure cargo with a local insurer, so letters of credit are very often opened on CFR terms: the supplier handles freight, and the buyer handles insurance at home.
Comparing offers on landed cost
To compare quotations, bring each one to the same point. Start with the quoted price and add whatever that term leaves out:
- Sea freight, if the price is FOB.
- Marine insurance.
- Bank charges for the LC.
- Duties and taxes at import.
- Port, shipping line and C&F agent charges.
- Inland transport to your store or site.
A note on containers
FOB, CFR and CIF were written for cargo loaded directly onto a ship. For containerised goods the ICC recommends FCA, CPT and CIP, because the seller hands the container over at a terminal before it is loaded. Many traders still use the sea terms for containers out of habit. It is worth knowing the difference when a claim arises.
This is general guidance. Standards, duties and procurement rules change, so confirm current requirements for your project before acting on it.