Many importers are happy to use the Incoterm® CIF because it saves them time, money and no doubt headaches. But they might not be so keen to use CIF if they knew what it was really costing them.
If you’re considering signing a contract with CIF, have a look at what other costs you could sign up for without realising.
What is the Incoterm® Cost Insurance Freight (CIF)?
The Incoterm® CIF requires the seller to organise and pay for costs, insurance and transport of the buyer’s order, while it’s in transit. Costs may include any additional customs duties, export paperwork, inspections or re-routing. The responsibility of any other costs transfers to the buyer once the freight is loaded.
Hidden Costs for the Buyer with CIF
With shipping, there’s a myriad of things that can go not as planned. With CIF, the seller makes the arrangements, but the buyer or importer takes some of the risks.
Demurrage is a penalty charge applied following a breach in the terms of the charter agreement after the free allotted time has run out. The exporter won’t give much thought to demurrage costs because it’s not their problem. They don’t bother negotiating the terms and conditions, so the buyer receives the standard terms of the company the exporter chooses.
This means the buyer has between three and ten days to clear and collect the goods after arriving in port before demurrage costs kick in. But it often takes much longer for customs clearance, port logistics, transporting the goods from the port to warehouse, unloading and returning the container. If the buyer has multiple containers, demurrage can cost hundreds of dollars per day.
The exporter completes customs documentation, but they don’t pay the penalties for non-compliance. If they don’t know the importing country’s requirements, the buyer is liable for the penalties and storage costs while they iron out the problems with customs.
Inflated Carriage Costs
CIF is popular amongst exporters who make more money on the transaction by charging the buyer a hefty premium on the carriage and insurance costs. Large exporters with high volumes can negotiate big discounts from shipping companies. They are free to keep the discount rather than pass it on to the buyer.
Damage or Loss of Goods
If goods are damaged, or the container is lost overboard on the journey to the buyer’s port, it’s the buyer’s responsibility to make the insurance claim. They have to deal with the shipping company and insurer who they don’t have a relationship with because they didn’t organise the policy.
The risk of fraud to the buyer is high with CIF. The buyer receives a quote from the seller and believes they’re getting a good deal on the freight only to find they’re overcharged by the receiving agent. The agent then remits part of the funds to the exporter who sold the freight.
Other importers have been burned using CIF because there is no guarantee that the seller has loaded the container with the goods they paid for. The buyer doesn’t find out for weeks until the container is opened, long after the funds have been remitted and the seller has disappeared.
Updates on Shipping
An importer using CIF can feel left in the dark about the progress of their container. An exporter may give the buyer an ETA on the shipment, but the ship may arrive earlier or later than that date. When containers arrive sooner than expected, the buyer may be hit with extra warehousing and demurrage costs.
Don’t Take the Risk With CIF
No one likes the nasty surprise of hidden costs. And when it comes to shipping, those unwelcome surprises can be expensive. If you’re unsure how to organise shipping, it’s wise to use an importing agent who can offer you protection against some of the risks.