trade.team@tradeﬁnanceglobal...(Incoterm) which was set out by the International Chamber of...

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INCOTERMS

The Ultimate TFG Guide to IncotermsPrepared by Trade Finance Global

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TABLE OF CONTENTS

1. Introduction

2. About TFG

3. Multi Modal Incoterms

4. EXW - Ex Works

5. FCA - Free Carrier

6. CPT - Carriage Paid To

7. CIP - Carriage And Insurance Paid To

8. DAT - Delivery at Terminal

9. DAP - Delivered at Place

10. DDP - Delivered Duty Paid

11. Sea and Inland Waterway Incoterms

12. FAS - Free Alongside Ship

13. FOB - Free on Board

14. CFR - Cost and Freight

15. CIF - Cost, Insurance and Freight

16. Contact Us

Incoterms are a standard set ofterminology, created by theInternational Chamber ofCommerce (ICC), useduniversally, defining the key partsof freight forwarding

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What are Incoterms?Incoterms are a standard set of terminology, created bythe International Chamber of Commerce (ICC), useduniversally, defining the key parts of freight forwarding.

In 1936 the ICC first defined the INternational COmmerceTerminology (INCO Terms), and we have summarised the11 most commonly used terms below.

Incoterms is a registered trademark of the InternationalChamber of Commerce.

We've put together this free guide for you to makeunderstanding International Commerce Terms easy!

Enjoy!Trade Finance Global Team

Incoterms - What's Covered?

What are Incoterms and Why are they used?What are the rules for all modes of transport?What are the rules for goods transported by sea or inlandwaterway?

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ABOUT TRADE FINANCEGLOBAL

Due to the fast pace of the market and increasingdifficulties faced, we understand that quickdecisions are needed within your business. Thisshould not compromise the ultimate financingsolution that you come to. We work with both yourcompany and our partner funders to assist instructuring a facility that works for your business.

Trade Finance Team (TFG)

Trade Finance Global assists companies withdebt finance. While we can access manytraditional forms of finance, we specialise inalternative finance and complex funding typesand help companies raise finance in ways thatmainstream lenders cannot.

We pride ourselves in both understanding trade finance andhaving an in-depth knowledge of many markets and sectors.This helps us to work with you to deliver the financing solutionsyou need.

It is important to look at the many facilities that are availablealong with the business need and sector. We do this and worktogether with you to try and create the most suitable andsustainable solution.

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MULTI MODAL INCOTERMS

International Commerce Terms that can be usedMulti-modally - Rules for all modes of transport

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EWW - Ex Works

- CHAPTER 1 -

Ex Works (EXW) is the term used to describe thedelivery of goods to an available designation at theirplace of business, normally in their factory, offices or

warehouse.

The seller does not need to then load items onto atruck or ship, and the remainder of the shipment is theresponsibility of the buyer (e.g. overseas shipment and

customs duty). EXW is therefore more favourable tothe seller as they do not need to worry about the

freight once it has left their premises.

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Ex Works – What are Ex Works?

Ex Works are a type of Incoterm,defined by the ICC.

Ex Works is a rule making theseller (or shipper / supplier) ofgoods responsible forpackaging and leaving thegoods at their factory or placeof manufacture.

The buyer (or consignee) is thenresponsible for everything else:

Loading goods onto transportTransporting goods to a port orterminalShipping the goodsUnloading the goods at thebuyer’s port or terminalTransporting the goods to theend destination or warehouse

Ex Works can be complex andproblematic for a buyer importinggoods from overseas, given that theywill still need the seller’scommunication or authority to passgoods through customs or providedocumentation to freight parties alongthe way.

In Ex Works, the buyer is responsiblefor everything from the point of thegoods being made available, sodiligent and detailed planning isadvised.

Ex Works is preferable for domestic (inmarket) transportation of goods, andthe buyer can use their preferredfreight forwarders or logistics partnersto arrange the transport, potentiallybeing cheaper than the sellerarranging the entire delivery process.

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FCA - Free Carrier

- CHAPTER 2 -

Unlike EXW, Free Carrier pushes the responsibility ofdelivering the goods to the buyers nominated

premises onto the seller, so they have to organiseshipping and various export documents.

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Free Carrier – What is Free Carrier?

Free Carrier is another type ofInternational Commercial Term(Incoterm) as defined by theInternational Chamber ofCommerce to standardiseglobal shipping terms andresponsibilities between thebuyer and the seller.

Free Carrier is a commonagreement where a seller (orshipper / supplier) of goods isresponsible for packaging andloading goods onto a truck attheir transport hub or port,different to Ex Works, where theseller is just responsible forgetting the making the goodsavailable at their own factory orplace of manufacture.

The seller is also responsiblefor export clearance of the goods atthe port or terminal.


Shipping the goodsUnloading the goods at the buyer’sport or terminalTransporting the goods to the enddestination or warehouse

When does FCA liabilitytransfer from the seller tothe buyer?The agreed transportation point of thegoods can be at a port, terminal orgoods loading point, providing it’swithin the home country of the seller.

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Free Carrier(continued)Once the goods are havebeen loaded and clearedcustoms (export clearance)and the shipment is accepted,responsibility shifts from theseller to the buyer to arrangeshipment and delivery to theend warehouse or customer.

The seller may charge for theirservices to arrange anycontracts to the carrier (e.g. acargo ship or airportauthority).

The buyer and seller mightarrange for the goods to beshipped by ocean freight ona container. The liability mighttherefore shift to the buyer atthe Container FreightStation or Container Yard –this needs to be clearlydefined and agreed by bothparties in advance.

Free Carrier is multimodalWhether the goods are shipped byinland waterway, rail, road, sea, air or acombination, FCA can be an agreedform of transport agreement betweenthe buyer and seller.

FCA can be less problematic than ExWorks as the seller is responsible forclearing customs, and they are likely tohave the relevant licenses.

FCA PriceThe price of Free Carrier can vary,depending on where the goods aredropped to, but there are several leversand known costs which should beinvestigated:

Fees to contract with the carrier(which the seller might do on thebuyer’s behalf)Shipping and transport costsInsuranceWarehouse StorageUnloading fees

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https://www.tradefinanceglobal.com/freight-forwarding/container-shipping/

https://www.tradefinanceglobal.com/freight-forwarding/incoterms/what-is-cfs/

https://www.tradefinanceglobal.com/freight-forwarding/incoterms/what-is-cy-cy/


https://www.tradefinanceglobal.com/freight-forwarding/air-freight/

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CPT - Carriage Paid To

- CHAPTER 3 -

“Carriage Paid To”, or CPT, goes into a little moredetail than FCA, specifying that the seller bears thecosts for transporting the goods to the nominated

place that the buyer requests.

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Carriage Paid To – What is CPT?

Carriage Paid To (CPT) is anInternational Commercial Term(Incoterm) which was set out bythe International Chamber ofCommerce in their Incoterms2010 guide with the aim ofstandardising shipping terms anddefining all of the responsibilitiesbetween buyers and sellers.

Carriage Paid To (CPT) is anInternational Commercial Term(Incoterm) which was set out bythe International Chamber ofCommerce in their Incoterms2010 guide with the aim ofstandardising shipping terms anddefining all of the responsibilitiesbetween buyers and sellers.

CPT is common for large importerswho have their own port agents thatcan manage the delivery of goodswhen they arrive in their country.

However, the risk of the seller passeson to the buyer once the goods leavetheir country or port, despite the sellerpaying for the transport of the goods.


Insuring the goods as they are beingshipped (but not paying for thisshipment)Unloading the goods at the buyer’sport or terminalTransporting the goods to the enddestination or warehouse

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As soon as the goods are delivered to the carrier (e.g. loaded onto the ship at theport of the seller’s country), the liability and risk of these goods is transferred over tothe buyer.

The agreed transportation point of the goods can be at a port, terminal or goodsloading point, providing it’s within the home country of the seller.

When does theliability shift fromthe seller to thebuyer under CPT?

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CIP - Carriage and InsurancePaid to

- CHAPTER 4 -

“Carriage and Insurance Paid to”, or CPI, specifiesthat the seller needs to pay the costs of transport as

well as the insurance cover for the goods in transit (byany transport mode) to the destination named by the

buyer.

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Carriage and Insurance Paid

CIP (or Carriage and InsurancePaid To) is an Incoterm wherethe seller is responsible for thedelivery of goods to an agreeddestination in the buyerscountry, and must pay for thecost of this carriage. The sellersrisk however, ends once theyhave placed the goods on theship, at the origin destination.The buyer can pay foradditional insurance duringcarriage of the goods.

The risk is passed when thegoods are received by the firstcarrier. Carriage and InsurancePaid to is eligible for any form oftransportation.

How does CIP work?Cost and Insurance Paid To requiresthe seller to pay for the cost oftransporting the goods and alsominimum insurance to transport themto the end destination.

With CIP, the seller pays for boththe transportation andthe insurance to the destination. Theseller also needs to insure the goodsduring carriage, and it’s normallyalways at a minimum cover level as theliability lies with the buyer at this point.Minimum insurance might not beadequate for manufactured goods orhigh value / precious merchandise.

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Carriage andInsurance PaidToGiven that the goods beingshipped are at the buyer’sown risk, it’s advisable for thebuyer to ensure adequateinsurance protection is inplace. The term ‘delivery’means from the country oforigin to the final destination.The seller also needs toarrange export clearancefrom the origin country of thegoods, which can be for anymode of transport.

In the case of CIP, damagedgoods can be claimed againstthe insurance companythrough the buyer. When thegoods arrive in the port ofdestination, the buyer needsto ensure the goods clearthrough customs.

1. Complying with contracts – GoodsDelivery The seller must prove the goods havebeen delivered and provide an invoiceor equivalent, as well as shipping /delivery proof

2. Licences and other formalities

The seller must provide a sufficientexport license for the goods, orgovernment authorisation to allow thegoods to leave the country

3. Insurance

The seller should provide a Contract ofinsurance at their own expense. Theseller must obtain at his own expensecargo insurance as agreed in thecontract, such that the buyer, or anyother person having an insurable interestin the goods, shall be entitled to claimdirectly from the insurer and provide thebuyer with the insurance policy or otherevidence of insurance cover.

4. Delivery

The seller must deliver the goods to thefirst carrier as agreed at a named placeand time

5. Transfer of risks

The seller is responsible for any goodswhich are lost or damaged if thishappens before the goods have beendelivered

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DAT - Delivery at Terminal

- CHAPTER 5 -

“Delivered at Terminal”, or DAT, means that all of thecosts up until the point of delivery to a nominated

terminal (e.g. a port or a quay) need to be covered.As in the table above, the buyer would need to

arrange Duties and Taxes and clearing goods throughcustoms. With DAT, the seller is also responsible for

unloading the goods at the terminal.

It’s advisable to ensure the terminal, hub or port isclearly specified, given the size of many terminals.

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Delivery at Terminal – What is DAT?

DAT, or, Delivery at Terminal, iswhere the seller clears goodsfor export and is fully responsiblefor the goods until they havearrived at a named terminal atthe end destination. The goodsmust be unloaded at theterminal. DAT can be used withany transportation mode.

It is recommended that theseller’s contract with theirforwarding company mirrors thecontract of sale.

Delivery at Terminal is usedwhen the seller’s responsibilityincludes the full delivery ofgoods up until the end terminalor port of destination, as well asthe unloading of the goods.

How does DAT work?The seller pays for all of the expensesincurred until the place of delivery andthe buyer pays for customs clearanceand taxes at destination.

‘Terminal’ means a quay,warehouse, container yard or any roadfor rail, air or road.

As with all of the ‘D’ incoterms, therisks and responsibility of goods getstransferred from the seller to the buyerat the same point – the end destination.DAT was specifically designed to meetairport and port deliveries.

For ocean cargo and shipping goodsby sea, any discharged containers arethen moved to a container yards (CY),which is where containers arestored before they are moved to theirfinal destination. Sellers areresponsible for any destinationterminal handling charges and thebuyer only pays for customs clearance,duties and taxes.

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https://www.tradefinanceglobal.com/freight-forwarding/incoterms/what-is-cfs/



Benefits of DAT

The key advantages of Delivery atTerminal are around convenience andreduced risk to the importer: 1. The supplier delivers goods to the destination place

(importer doesn’t need to cover these costs)2. The risk is transferred from the supplier to the importer once

the goods have been dispatched and unloaded at a definedplace at the destination

3. The supplier bears the responsibility for most of thecarriage/transport of the goods from the origin to thedestination

4. Less hassle and organisation for the buyer of goods

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DAP - Delivered at Place

- CHAPTER 6 -

“Delivered at Place”, or DAP, can also be used for anymode of transport. An extension of DAT, the seller

delivers the goods at a named destination, specifiedby the buyer, although under the ICC rules, the

unloading of the goods are the responsibility of thebuyer.

The buyer is also required to sort out duties and taxes,as well as clearing the goods through customs.

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Delivered at Place – What is DAP?

DAP, or, Delivery at Place is anincoterm defining the buyer andseller’s responsibilities whenmoving goods. In this case, theseller is responsible for movingthe goods from the country oforigin right through to the enddestination, which includesresponsibility for loading,transport and unloading.

With DAP, we’d recommendbeing very clear about the enddestination place to avoid anyconfusion later on. DAP meansthat seller bears the risk of anyissues with the goods until theagreed delivery point. If thereare any extra fees for unloadingthe goods, the seller must incurthese.

This term can be used for anymode of transportation.

How does DAP work?DAP requires the seller to load, shipand unload the goods at an agreeddestination place (normally after theport or terminal where the goodsarrive at the country of destination).DAP can be used for any mode oftransportation, and the seller needs topay for:

import customs clearancedutiestaxesloading / unload costs

Contrary to DAT, goods are deliveredunloaded from the transport vehicle.

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https://www.tradefinanceglobal.com/wp-content/uploads/2018/02/DAP-Diagram.png



DDP - Delivered Duty Paid

- CHAPTER 7 -

“Delivered Duty Paid”, or DPP, can be used for anymode of transport. In this case, the seller is responsiblefor delivering the goods at a place specified by thebuyer, up to the point of unloading. Unlike DAP rules,

the seller is also required to pay for all Duties andTaxes, clear the goods for import and pay relevant

taxes.

DPP is often complex as shipment of goods into amarket are often best left to local experts (e.g. the in-

market buyer), so it’s a less commonly used INCOTerm.

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Delivered Duty Paid - What is DDP?

DDP stands for Delivery DutyPaid, an internationalcommerce term (incoterm)used to describe the delivery ofgoods where the seller takesmost responsibility.

Under DDP, the supplier isresponsible for paying for all ofthe costs associated with thedelivery of goods right up untilthey get to the named place ofdestination. The buyer is thenresponsible for unloading thegoods at the end destination.

DDP can be used to describeocean, road or air transportationof goods, including multimodaltransportation.

It’s also expected that the sellerclears the goods at export andimport customs.

How does DDP work?DDP requires the supplier to delivergoods from their factory / plant to anagreed point, known as the destinationplace. This could be theterminal, container yard, factory orwarehouse of the buyer. The supplier isresponsible for:

Clearing goods through export andimport customs VATPaying for duties and other taxes

DDP is most risky for the seller ofgoods, so is normally used byadvanced suppliers. DDP is usedparticularly when the cost of supplydoesn’t vary too much and is easy topredict.

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Benefits of DDPThe key advantages of DeliveryDuty Paid are in favour of thebuyer. The seller takes mostresponsibility and risk.

DDP puts the maximum risk andresponsibility on the seller. It isthe only one of the Incotermsthat requires the seller to takeresponsibility for importclearance and payment.

The seller bears all the costs andrisks involved in bringing thegoods to the place ofdestination. The seller is obligedto clear the goods for bothexport and import, to pay dutiesfor both export and import, andto execute all customsformalities.

Sellers may not understand thecomplex and bureaucraticimport clearance proceduresthat exist in some countries andmake mistakes ormiscalculations that affect theirbottom line; therefore, it may bebest left to the buyer who haslocal knowledge andunderstanding. Keep this in mindbefore choosing DDP.

1. The supplier takes on themost risk and responsibilityas opposed to the buyer.DDP is one of the onlyincoterms that requires thesupplier to also takeresponsibility for importclearance and paying forvarious import taxes

2. The supplier takes on all ofthe cost for transporting andgetting the goods to the enddestination

3. The supplier needs to cleargoods through customs atboth the country of originand place of destination, aswell as clearing all customsformalities, duties and taxes

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SEA & INLAND WATERWAY

Incoterms that can be used specifically for goodstransported via Sea or Inland Waterway

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FAS - Free Alongside Ship

- CHAPTER 8 -

“Free Alongside Ship”, or FAS, is used in situations whenthe seller can place the goods alongside other non-

containerised goods (e.g. on a vessel or barge).

The seller might do this if they have access to sea orinland waterway routes and want to place the goodsen route to the buyer alongside other goods on theship. It’s not recommended for goods that can be

placed in a container (more on this below, see FCA).

The risk of transporting the goods ‘alongside ship’move from the seller to the buyer once the goods are

delivered to a terminal or port and unloaded.

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Free Alongside Ship - What is FAS?

FAS stands for Free AlongsideShip, an internationalcommerce term (incoterm)used to describe the delivery ofgoods where the seller takes onsome responsibility for theshipment of goods.

Under FAS, the exporter isresponsible for clearing thegoods at customs and deliveringthem to the vessel at the pointof origin.

Free Alongside Ship only appliesto sea or inland waterway ports.As with most points of delivery,it’s recommended to highlightthe exact location at which thegoods are being delivered to,particularly in the case of largeports as the seller is responsibleup for the goods until the port ofshipment.

FAS is ideal for the shipping:

Hard commodities (e.g. oil)Soft commodities (e.g. grain,soybean)LiquidsChemicals(both pharmaceutical and non-pharmaceutical)Bulk cargoBreak bulk cargo

FAS is generally not used forcontainerised goods as they wouldoften be delivered to a container yardor terminal; in this case, FCA might bea more appropriate incoterm to go by.

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https://www.tradefinanceglobal.com/finance-products/fuels/

https://www.tradefinanceglobal.com/blog/global-grain-conference/

https://www.tradefinanceglobal.com/finance-products/pharmaceuticals/

https://www.tradefinanceglobal.com/finance-products/non-pharmaceutical-chemicals/

https://www.tradefinanceglobal.com/freight-forwarding/incoterms/fca-free-carrier/



Free AlongsideShipIn the case of FAS, the seller isresponsible for delivering thebuyer’s goods next to theshipping vessel. The seller isalso responsible forcompleting export customsdocumentation. FAS is oftenused for cargo that doesn’t fitinto containers – known asOut of Gauge (OOG) cargo –as these would typically betransported to a containeryard under the FCA incoterm.

FAS is applicable to goodsbeing transported by inlandwaterway and sea transport,and the costs for loadingthese goods onto the vessel isthe responsibility of the seller.

With FAS, the buyer is thenresponsible for the cost ofloading the goods onto theship, and all costs thereafter.

Benefits of FASThe key advantages of Free AlongsideShip:

FAS is ideal for situations where theseller can easily access the vessel forloading the goods, for example, withbulk cargos or non-containerizedgoods.With FAS, the risk transfers to the buyerwhen the goods are alongside theship, and the buyer bears the costand responsibility thereafter.

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FOB - Free On Board

- CHAPTER 9 -

“Free On Board”, or FOB, occurs when the sellerdelivers the goods to the port of shipment, at whichthen it becomes the responsibility of the buyer onceunloaded onto a vessel. If the goods are damaged

when on board the vessel, it’s the responsibility of thebuyer.

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Free on Board - What is FOB?

To understand FOB pricing, one mustunderstand what FOB means.

FOB is the short form term for Free OnBoard (or Freight on Board) androughly translates to mean that thecost of product being delivered tothe nearest port is included in thepurchase price, but the purchaser isliable to pay the shipping costs fromthat port. This is along with all otherfees for the onward journey to theport of the buyer’s destination.

It is clearly understood when thisshipping term is used, that thesupplier will pay for the product costand inland delivery costs from theirfactory to the port. This will notinclude costs in relation to onwardshipping fees.

FOB Price FOB is best understood by contrastingit with other shipping terms. Asdiscussed above, when purchasingFOB the buyer will pay for thetransport. In contrast to this manycontracts are EXW (Ex-Works) or Ex-Factory cost. Therefore, it is just thecost of the product that is paid by thebuyer; which includes notransportation or customs costs in thefee paid.

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CFR - Cost and Freight

- CHAPTER 10 -

“Cost and Freight”, or CFR, incurs more risk andresponsibility onto the seller. The seller delivers the

goods up and takes all responsibility and cost right upuntil the ship has docked at the end point and the

goods have been unloaded. The seller will also coverthe cost of insurance at atleast the minimum level.

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Cost and Freight - What is CFR?

CFR stands for Cost and Freight –it’s a legal term used ininternational shipping meaningthe seller assumes moreresponsibility for the delivery ofgoods and needs to pay fortransport to an agreed port. Theseller will also need to pay forthe delivery of goodsand export, up until the pointthe goods are loaded on boardthe ship.

It is important to first note thedifference betweenthe shipping terms CFR and CIF.CFR stands for Cost and Freight.

Cost and FreightThe term CFR means that the seller hasmore responsibility; they will pay forand arrange transportation. This canbe contrasted with a seller under anFOB shipping transaction; where theseller is merely responsible for deliveryof the goods to the port of origin; theywill then be transported.

In relation to a CFR trade, the exporterwill pay for and arrange transportationto the port of destination that isspecified by the receiving party. Theexporting company will arrange andfund the transportation that is set outby the purchasing party. In relation toliability and ultimate responsibility, thepurchaser will take on theresponsibility when the ship hasdocked in the port of destination. Thefurther costs that will include furthertransportation and the unloading ofthe vessel will be bared by the buyer.

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Cost, Insurance and Freight

- CHAPTER 11 -

“Cost, Insurance and Freight”, also known as CIF, isalso restricted to sea or inland waterway modes oftransport. In this case, the seller insures the goodstransported up until they arrive at the port, but it

becomes the responsibility of the buyer (in terms of riskand insurance).

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Cost, Insurance and Freight

What is Cost,Insurance andFreight?CIF stands for Cost, Insuranceand Freight – it’s a legalincoterm term which is used ininternational shipping for thedelivery of goods to a port. Inthis case, the seller must pay forthe delivery of goods, andtheir export, including insurance,and has responsibility of thegoods right up until they’reloaded on the ship.

CIF and FOB (Free on Board) arethe most common shippingterms.

The term CIF means that the seller hasmore responsibility; they will pay forand arrange transportation, freightduties and insurance. This can becontrasted with a seller under an FOBshipping transaction; where the selleris merely responsible for delivery ofthe goods to the port of origin; theywill then be transported.

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CIF Tips

Watch outs for importers and tips for CIF:

Your supplier has control of the insurance coverage – thismeans that the seller is likely to choose the cheapest / mostbasic insurance option for your productWatch out for the beneficiary of the insurance policy – in thecase of damages, if the seller is the beneficiary if your goodsget damaged in transit, payment will go to them to then bereimbursed to you as the importerCIF stops after the goods arrive at the port – if goods aredamaged at the port or when unloaded, as well as anyadditional port or storage fees are incurred, this will be yourresponsibilityCIF could be more expensive – given that the seller invoicesCIF, the costs might be inflated above the actual cost ofinsuring your goods

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