August 13, 2013
What are Incoterms?
If your company trades on an international basis, or either ships or receives shipments from an overseas market, then you should be aware of International Commerce Terms (Incoterms), a set of standardized terms used in international trade.
Incoterms are rules of trade that essentially dictate the exact delivery terms between two parties. These terms would include how the goods will be delivered, who pays, who is responsible for insurance, and who handles specific procedures such as loading and unloading. After first being established in 1936, it is now the accepted terms of trade of governments and the United Nations.
There are several benefits for small businesses that use Incoterms wisely. Here are three things you need to know in order to maximize these rules for your business.
1. Know the rules
The most recent update of Incoterms was made in 2010, and includes eleven rules divided into two classes – terms for any mode of transportation and terms for sea and inland waterway transportation, as shown in the table below.
To further our understanding, let’s look at these terms more closely:
E terms (EXW): The seller makes available its goods at their premises in order for the buyer to collect. This is the minimum obligation for the seller.
F terms (FCA, FOB, FAS): The seller delivers the goods to a carrier appointed by the buyer. The seller will arrange and pay for delivery of goods to the carrier, but the buyer pays for everything after that.
C terms (CFR, CIF, CPT, CIP): The seller has to contract for carriage, but does not assume the risk of loss or damage after the shipment.
D terms (DAT, DAP, DDP): The seller bears all risk involved in bringing the goods to the buyer.
2. The main benefit of Incoterms is to reduce risk
Due to the fact that countries have different business cultures and languages, it’s wise to have a clearly-written contract to reduce any misunderstandings. Thus, the main benefit of Incoterms is reduced risk in a transaction.
By specifying the exporting seller’s and importing buyer’s obligations, there is no confusion with regards to rules of transportation from point A to point B. Incoterms do not cover, however, ownership or title transfer of the goods. These terms are agreed upon separately between the two transacting parties.
3. Most Small Businesses Fall Under C-Terms
As a small business, how do you navigate all of these rules? In particular, small businesses need something that is convenient for the buyer, but at the same time mitigates costs and risks to the buyer.
The best Incoterm class for small businesses would be the C-term rules. In particular, CIF is the most common because there will be a stronger grasp on shipments. In this scenario, the seller takes responsibility for all costs until the cargo is loaded at the origin port, but the cost passes to the buyer at the specified discharge port.
Coupled with a sophisticated shipment tracking system and order fulfillment service, the competitive advantage of a small business with international clients will be given to those who use Incoterms wisely.