In this second instalment of our Incoterms series we want to speak in more detail about the similarities and differences between FOB (Free on Board)and CFR (Cost and Freight), two Incoterms used specifically for maritime transport.
Remember you can read our first post here where we explained what are Incoterms and why are they so important to get all the basics.
FOB & CFR – Similarities and differences
Both Incoterms share two main similitudes:
- FOB (free on board ) and CFR (cost and freight) are Incoterms especific only for maritime transportation and inland waterways.
- In both cases the transfer of risks from seller to buyer occurs when the goods are loaded on board of the chosen vessel.
This can make them look very likely that’s why is essential to know the differences between them:
- Each Incoterm is from a different category, which points out their main difference: who is responsible for the arrangement and payment of the transportation and customs formalities, and from which point onwards.
- This means in FOB, the seller is responsible for all risks and costs until the goods are loaded onto the ship. Then the buyer (on top of being responsible for the risks) is the one who arranges and pays for the cost of freight, import clearance, unloading and delivery at final destination.
- When choosing CFR, the risks pass from seller to buyer when the goods are loaded into the freight but in this case the seller is still responsible for the arranging and payment of the transport, export clearance and costs at origin until the cargo arrives at the destination port. From then to final destination is the buyer who is responsible to transport the goods from one point to the other.
Most used Incoterms in LCL
All this said, it can seem like this Incoterms are not recomended for containerized cargo, as with LCL cargo packaged goods can spend a few days in warehouses before being loaded into their ship. But in reality, both FOB and CFR are the two Incoterms most used in LCL.
Then, which one is best for my internation operations?
FOB vs CFR which one to choose?
Chossing the best for you will depend on the part you play in the transaction.
When importing it is best to choose FOB as in this case the buyer is the one with more control about the providers to transport their cargo from origin to place of destination and this can help save not only money but also delays or unexpected delays and problems. In fact, this is the most used Incoterm by importers.
On the contrary, when exporting it’s best to choose CFR as the seller is who has more control, and that is why in turn this is the Incoterms most used by exporters, well above CIF which implies the seller has to pay for the insurance.
As we’ve already said, knowing what each Incoterm entails is the best way to a profitable international commerce operation. Negotiation between seller and buyer can be difficult as each party looks after themselves but that is also why the correct use of Incoterms is so important.