I’m so excited to head to Colombia next week to join Lia in exploring Medellin and finalizing our manufacturing agreement! We just received all the samples from the factories we’re evaluating and will be making a decision on who we’re partnering with very soon.

As we’re getting closer to production and talking price, there’s an overwhelming number of abbreviations I’ve had to get familiar with. Of particular importance are the different commercial trade terms for the delivery of goods, or Incoterms; these rules govern each party’s tasks, costs, and risks and inform respective obligations in sales contracts. The terms tell you exactly how the goods are going to get to you and who is responsible for what.

As a buyer, there are pros and cons of each trade term. For beginners, it might be tempting to choose the method where the supplier handles everything end to end and gets the goods to your front door, but upon learning more there are a lot of benefits of assuming more control in the process. The more the supplier handles, the less transparency in pricing you have. 

The general advice I’ve also received is to definitely invest in a customs brokerage firm that can help you navigate the trickiness of this process. Fun fact: My mom is a customs broker so she’s been helping me learn a lot of this stuff! If you’re looking for a customs/freight forwarding/logistics provider check out Hecny Group.

Here’s an easy guide I put together on what some of the most common trade terms are:

FOB

Free on Board (FOB) is one of the most common agreements, especially if your supplier is based in Asia. It’s popular because there’s about an even amount of risk and obligation from both the buyer and the supplier.

  • Transport method: Ocean freight
  • Seller pays for: Transportation of goods to port of shipment, cost of loading, customs clearance
  • Ownership transferred to buyer when: Goods leave shipping port of supplier’s country

FCA

Free Carrier (FCA) means the seller is responsible for delivering the goods (may be required to be custom cleared) to a destination that the buyer designates within the supplier’s country. The difference between FOB and FCA is that in FOB, the seller is responsible for getting the goods on board the vessel; in FCA, the seller is responsible for getting the goods to the buyer’s defined location (usually a terminal like airport or port), but the seller is not responsible for loading the goods onto the vessel. In some cases, the defined location may be the supplier’s own premises.

  • Transport method: Any (ocean, air, rail etc)
  • Seller pays for: Delivery of goods to buyer’s nominated location (usually carrier terminal), may be responsible for customs clearance in certain situations
  • Ownership transferred to buyer when: Goods arrive at buyer’s nominated location, buyer is responsible for loading goods into vessel

CFR / CIF

Cost & Freight (CFR), and Cost, Insurance & Freight (CIF) terms are similar with the exception that in a CIF agreement, the seller is required to obtain insurance for the goods while in transit to the named port of destination.

  • Transport method: Ocean freight
  • Seller pays for: The carriage of goods to the named port of destination; customs clearance, freight to buyer’s port (In CIF, seller also pays for insurance)
  • Ownership transferred to buyer when: Goods arrive in the port of buyer’s country

*If you’re looking for the CIF equivalent of using any transportation method, it’s Cost & Insurance Paid (CIP).

DDP

Delivered Duty Paid (DDP) is the agreement where the seller assumes ALL risks and costs until the goods are delivered to the buyer’s named place of destination (usually the warehouse). It may sound easy peasy as a buyer, but if the seller is not knowledgeable of the buyer’s country requirements it can pose a huge problem in overcoming complex and bureaucratic procedures. Since the seller is covering all the costs there’s also opportunity for the seller to drive a markup on the pricing.

  • Transport method: Any (ocean, air, rail etc)
  • Seller pays for: All costs in delivering goods to end destination; Arranging carriage, customs clearance, duties and taxes, freight forwarding
  • Ownership transferred to buyer when: Goods arrive at buyer’s destination and are ready for unloading

EXW

Ex Works (EXW) is for buyers who want complete control and transparency of the delivery. However, there could be some complications during the customs clearance process to get the necessary export documentation from the seller.In practice, Ex Works is sometimes not a viable option due to certain jurisdictions’ customs rules. In the European Union, for example, a non-resident individual or corporation cannot complete the export declaration documents, so the buyer may be left stranded.

The EXW term is often used when making an initial quotation for the sale of goods without any costs included.

  • Transport method: Any (ocean, air, rail etc)
  • Seller pays for: Making goods ready for pickup at seller’s premise
  • Ownership transferred to buyer when: Goods are picked up from seller’s premise; buyer is responsible for loading them onto a truck, transferring them to the carrier terminal, customs clearance, etc

 

This is meant to be a high level overview of some of the most popular trade terms that we’ve encountered, and by no means does it cover all the nitty gritty aspects of liability. Would love to learn more about your experiences on which method you chose and how it worked out for you.

And for those who are trying to wrap their heads around this, we are in the same vessel! Hope this helps you get started.