CIF or FOB the advantages and disadvantages
The abbreviation CIF stands for “cost, insurance and freight,” and FOB means “free on board.” These are terms are used in international trade in relation to shipping, where goods have to be delivered from one destination to another through maritime shipping. The terms are also used for inland and air shipments.
CIF is considered a better way to buy goods for those who are new to international trade. It might also be a better option for new traders who have small cargos. In CIF, the seller is responsible for transporting goods to the nearest port, loading the goods on the ship and paying freight for the goods to be delivered to a port chosen by the buyer. The seller is also responsible for paying insurance for the goods.
It is better to buy FOB for those who are already familiar with international trade. These traders have their own forwarding agents and logistic agents in place at the port where the buyer loads the goods to be imported. In FOB trading, the seller is only responsible for taking the goods to the nearest port on his or her end. This location is indicated after FOB, and it is important to accountants, as goods become assets to the buyer on the day they reach that location. The goods are considered delivered once they cross the ship’s rail. The buyer is therefore responsible for paying the ship’s freight and insurance. The advantage of buying FOB is that the buyer can get better deals on freight services, unlike in CIF where the buyer has to rely on the freight services chosen by the seller. This is because the seller might be looking to make profit from the freight services. The buyer therefore makes profit from buying FOB.
A simple rule of thumb in international trade is to buy FOB and to sell CIF. Following this rule can lead to some profit for the trader.