What are Incoterms?
Incoterms are terms like: FOB, CIF, DDP – and you will find them specified on purchase orders for the manufacture and import of goods.
Incoterms are established by the ICC, and were last revised in 2010, so you should always see the reference being to “Incoterms 2010”. This is important.
In trade finance, incoterms are important because they define:
- Who is responsible for what, including licenses, custom duties, insurance and cost
- When ownership of the goods moves from the exporter to the importer
- Where the goods are handed over
What are the elevent Incoterms 2010?
There are eleven incoterms.
The following are used with all modes of transport:
- EXW, ex-works (handover at the factory)
- FCA, free carrier (handover to the logistics provider)
- CIP, carriage and insurance paid (handover to the logistics provider and pay costs)
- CPT, carriage paid to (handover at a nominated destination)
- DDP, delivered, duty paid (handover to the buyer in the buyer country after import customs)
- DAT, delivered at terminal (handover for unloading before import customs)
- DAP, delivered at place (handover at a nominated destination before import customs)
And these four are used only with ocean transport (by ship):
- FAS, free alongside ship (deliver to the export quayside)
- FOB, free on board (deliver to the ship at the export quayside)
- CFR, cost and freight (basically the same as CPT)
- CIF, cost, insurance and freight (basically the same as CIP)
What do the Incoterms mean in practice?
The Incoterms tell us:
- Who is organising carriage and insurance?
- Who is paying some or all of the costs of getting the goods to the buyer?
- Who needs permissions and licenses (to get through customs, for example)?
- When ownership of the goods moves from the seller to the buyer?
We can summarise the terms as follows:
- EXW, FCA, FAS, FOB: buyer is taking responsibility for the freight costs and insurance after the goods are handed over to a specific destination, which is in the Seller country. So these are the easiest for the Seller because the buyer is clearing customs and managing the transport process.
- CFR, CPT, CIF, CIP, DAP, DAT: seller is taking responsibility for managing transport, paying for freight costs and sometimes also insurance, and also clearing the goods through his export customs but not the import customs. The different terms refer to where the goods are handed over.
- DDP: this is toughest on the seller, who is taking responsibility also for importing the goods and delivering the goods to the buyer’s premises in the import country.
How do Incoterms affect trade finance?
The seller wants PrimaDollar to pay him as early as possible, whilst the buyer would like to pay PrimaDollar back as late as possible. This is fine. The purpose of trade finance is to bridge this gap.
As a general principle, transactions that use Incoterms where the seller responsibility is low are the easiest to finance.
So what is important to know?
Trade finance transactions are easiest to organise with FOB incoterms – where the Seller hands over the goods after clearing local customs, and where ownership of goods transfers to the buyer when the goods are loaded onto the boat. If you are an exporter requiring finance, you should prefer this way of working.
If you need finance and the transaction is going to use DDP incoterms, then you need to call us so that we can explain how to proceed.
How can I find out more?
With a global network and global coverage, talk to us.