If you offer international delivery or export goods overseas as a seller, you’ll need to know the most common shipping terms used to transport items abroad and their meaning. Failing to fully understand what a shipping term means can cause a lot of issues for you and your business, and could even lead to delays and disputes.
From insurance when exporting products internationally to understanding who is responsible for international delivery, understanding the meaning of a shipping term and what it is used for will help you avoid any issues now and in the future. In this complete guide, we’re going to explain what shipping terms are, why they’re used, and 12 Incoterms you should know.
Table of Contents
- What are shipping terms?
- 3 benefits of using shipping terms
- What are the 12 Incoterms?
- Which Incoterm should I use?
- Sell on Alibaba.com
What are shipping terms?
Shipping terms, also known as incoterms or ship terms, are three-letter abbreviations used when exporting goods overseas. Created by the International Chamber of Commerce in 1939, shipping terms or incoterms (International Commercial Terms) make it easier for businesses to communicate effectively when exporting goods around the world. Since international trade will often involve language barriers, shipping terms, or ship terms, break down barriers to communication and help minimize the chance of miscommunication between sellers and freight companies. Throughout this article, we will use shipping terms, incoterms and ship terms interchangeably.
Note, however, that as an online seller involved in international trade, understanding both domestic and international shipping terms is crucial. While domestic shipping terms primarily apply to shipments within a single country, international shipping terms (incoterms) are used to define the responsibilities and obligations for shipments that cross borders.
Shipping terms also act as a contract between two parties, as they clearly outline who is responsible for each task and what is expected of them. So, incoterms will tell everyone involved with a delivery who needs to cover the cost of exporting goods abroad. This may involve customs clearance, duties, and freight. In some cases, the seller will cover all costs, but at other times it will be the buyer. Put simply, shipping terms refer to three things:
- Who is responsible for arranging transport and the carrier.
- Who needs to cover the cost of transport.
- Where and when the goods will be transferred from the seller to the buyer.
If this is the first time you’ve come across the term'shipping terms’ as a small or large business, don’t panic. We’re going to clearly explain every shipping term you’ll ever need to know! Once you’ve mastered these ship direction terms, you’ll feel more confident when exporting goods around the world.
3 benefits of using shipping terms
Empowers international trade
Trading overseas is made easier when using these cargo shipping terms. As long as sellers, freight companies, and buyers understand what these terms are, what they represent, and how to use them correctly, exporting goods and trading on a global scale is a simple and straightforward process. From the distribution center to the shipping recipient, disputes and disruptions to the supply chain can be avoided when using shipping terms correctly. The key to a successful international business is a steady flow of cash, stock ready to ship, and excellent customer service, and incoterms can help sellers achieve this.
Incoterms impact monetary gain
If you want to have an edge over your competitors, incoterms could be the answer. When international shipping terms are effectively used, they can ensure goods are delivered on time and payment is received. This gives businesses involved in the entire overseas supply chain a competitive advantage. Should a single government be able to change shipping terms and regulations, this could encourage bribery and unfair business practices. But, by everyone using a standardized set of terms and terminology, penalties, fines, and criminal activity can be avoided.1
Standardized terminology minimizes mistakes
While regular business terms and phrases can often be misunderstood between sellers and buyers, language barriers can also cause communication issues when you start trading overseas. That’s why using international shipping terms is best for carriers and buyers. By using the same terms when exporting goods abroad and trading internationally, there is no room left for error or confusion about each party’s role, responsibility, and management. So when sending goods from one destination to another, whether it’s within the same continent or thousands of miles overseas, shipping terms can give all parties involved complete peace of mind.
If you’re completely new to the world of exporting overseas, read our ultimate guide: How to Start An Export Business
What are the 12 Incoterms?
So, let’s look at 12 of the most popular Incoterms in global trade and what they actually mean and represent.
FCA - free carrier
This is a term for the transport of goods in the shipping industry that tells the seller to deliver the products to a certain destination, to the carrier chosen by the buyer. This destination will determine the loading and unloading requirements in the first transport. If delivery is made on the premises of the seller, then they are liable for the load. However, if the delivery takes place elsewhere, then the buyer is responsible for unloading the shipment. This also lets both parties know that the seller will take care of the export customs clearance. Since a new rule came into force in 2010, the buyer can now instruct its carrier to issue a bill of landing with an on-board notation to the seller so that they may satisfy the terms of a letter of credit.2
EXW - ex works
If you see this incoterm, it means that the seller will deliver to their own warehouse or factory for the buyer to pick up. The seller does not load the goods for the buyer or is involved in export clearance. The buyer is therefore responsible for all expenses and risks involved.
DPU - delivered at place unloaded (formerly known as DAT delivered at terminal)
This abbreviation refers to risk and responsibility. The seller will deliver the goods unloaded in the country of destination, in a port or airport for example. Then transportation risk is passed from the seller to the buyer as delivery is made and completed. The export customs clearance is handled by the seller, but import customs clearance and any tariffs are paid by the buyer.
CPT - carriage paid to
CPT is a term for the transport of goods in the shipping industry that means that the seller contracts and pays for transportation to the delivery destination in the buyer’s country. When the goods are received by the first carrier in the chain, the seller is no longer responsible for the items and all risk is passed over to the buyer. The export customs clearance is completed and handled by the seller.
CIP - carriage and insurance paid to
In the same way, CPT refers to the obligations to the seller, this incoterm means that the seller is also responsible for transport and shipping insurance. The seller is now also responsible for purchasing a higher level of insurance coverage, at least 110% of the value of goods as detailed in Clause A of the Institute of Cargo Clauses2.
DAP - delivered at place
The seller must deliver the goods to the country specified by the buyer, and the items must be ready to be unloaded in a place other than a terminal or transport infrastructure. The risk of transporting the goods passes from the seller to the buyer once delivery has been made. The buyer pays import customs clearance and tariffs, but the seller completes export customs clearance.
DDP - delivered duty paid
This shipping term means that the seller will deliver the goods, ready for unloading, at the place of destination requested by the buyer. This is usually a factory or warehouse owned by the buyer. All risks and costs, including customs fees such as clearance of export and import, are handled by the seller.
FAS - free alongside ship
FAS means that the seller is obliged to deliver the goods, alongside a vessel at the port of destination. Once delivered, all costs and associated risks are passed over to the buyer, although the seller handles customs clearance.
FOB - free onboard
When shipping goods overseas, FOB refers to the responsibility of the seller to deliver goods on board the ship, at the port of shipment. The buyer chooses to ship and pay for freight. The transportation risk will move from the seller to the buyer once the goods are delivered and are safely onboard the ship. With FOB, export customs clearance is handled by the seller. This incoterm also applies in domestic shipping terms where the seller assumes the responsibiity of the goods up till the point of boarding or port of shipment. After this point, the buyer takes on the responsibility.
CFR - cost and freight
If you use CFR, this means that the seller is responsible for freight to the port of destination. But, once the goods are loaded onto the ship at the shipment port, the risk of loss or damage to the goods moves from the seller to the buyer. Again, responsibility for export customs clearance lies with the seller.
CIF - cost, insurance, and freight
Going back to CFR, the same obligations apply to the seller when using the shipping term CIF. The seller must also provide and pay for transport insurance to safeguard the goods, but insurance coverage only needs to be at a basic level3.
LCL - less than container load
LCL is a common shipping term used when exporting overseas and to a named port. Small ocean freight shipment is transported using this code when the shipper doesn’t contract for a full container due to the low quantity of goods. In this case, a freight forwarder may create a consolidation by putting together multiple LCL shipments before gating in at the container yard at the place of destination or named port4.
Which Incoterm should I use?
While international sellers should be aware of the majority of shipping terms, you may not need to use all of them while exporting goods overseas. So, which Incoterms will an online seller trading internationally need to use?
The most commonly used shipping terms:
- FAS - for heavy and bulky machinery, this shipping term is often used and helps to export such items abroad easier.
- FCA - one of the best shipping terms for international sellers. By using this term, the seller doesn’t need to be involved with transport costs and won’t be responsible for additional risks.
- FOB - while this particular incoterm is widely misunderstood, it is also a popular term to use among global sellers. FOB is only intended to be used for shipping goods, and the seller is responsible for loading the goods onto the ship sent by the buyer. Once goods are on board, the seller is free of responsibility.
If you’re thinking of exporting goods overseas, read our latest article on: Benefits of exporting for small businesses
Sell on Alibaba.com
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References
1. https://flashglobal.com/4-reasons-why-incoterms-understanding-is-vital-for-a-undisrupted-global-supply-chain/#:~:text=Incoterms%20Affect%20Monetary%20Gain%20and%20Competitive%20Advantage.&text=Similarly%2C%20Incoterms%20ensure%20all%20parties,in%20the%20international%20supply%20chain.&text=As%20a%20result%2C%20the%20incidence,are%20used%20in%20international%20trade
2. https://www.shippingsolutions.com/blog/beginners-introduction-to-incoterms
3. https://internationalcontracts.net/contract/11-incoterms-en
4. https://www.cogoport.com/shipping-terms/less-than-container-load-lcl-53#:~:text=LCL%20is%20an%20ocean%20shipping,contract%20for%20a%20full%20container
