International trade involves complex shipping arrangements and regulations, making it essential for businesses to have clear guidelines. Shipping Incoterms make it easier by clearly stating who handles what during shipping, like costs, risks, and delivery. This helps businesses avoid confusion and disagreements. By choosing the right Incoterms, companies can save money, reduce risks, and build better relationships with global partners.

What are Incoterms?

Shipping Incoterms are standardized rules that outline the responsibilities of buyers and sellers in international trade. They specify when and where risks, costs, and ownership of goods transfer during transportation.

Developed and maintained by the International Chamber of Commerce (ICC), a global organization facilitating trade, these terms are periodically updated to reflect global trade practices and logistics changes. The latest version, Incoterms 2020, has been in effect since January 1, 2020. By clarifying who handles shipping, insurance, customs, and delivery tasks, Incoterms ensures smoother and more predictable global trade operations.

What are the Different Types of Incoterms?

Shipping Incoterms 2020 includes 11 terms, divided into two categories based on the mode of transport:

1. Terms for Any Mode of Transport

EXW (Ex Works) In this case, the seller makes the goods available at their premises, and the buyer handles everything else, including loading, transportation, customs clearance, and risks. This term is the least favorable for buyers because the seller has no further responsibilities.

FCA (Free Carrier) Here, the seller delivers the goods to a location chosen by the buyer (e.g., a transport hub or carrier’s warehouse) and handles export clearance. The buyer takes over responsibility and risk once the goods are handed over.

CPT (Carriage Paid To) With this term, the seller pays for transportation to the destination and handles export clearance, and the buyer assumes risk once the goods are given to the first carrier and handles import clearance.

CIP (Carriage and Insurance Paid To) Similar to CPT Incoterms, but in this case, the seller also provides insurance covering at least 110% of the goods’ value. The seller pays for transport and insurance, and the buyer takes the risk after the goods are handed to the first carrier.

DAP (Delivered at Place) In this arrangement, the seller delivers the goods to the agreed destination and covers all transportation costs, and the buyer handles unloading and import clearance. Risk remains with the seller until the goods arrive at the destination.

DPU (Delivered at Place Unloaded) DPU is an Incoterm that replaced DAT (Delivered at Terminal) in the 2020 Incoterms update. Unlike DAT, which requires delivery at a terminal, DPU allows delivery at any agreed location as long as the seller is responsible for unloading the goods. The buyer then takes over import clearance and any further transportation.

DDP (Delivered Duty Paid) In this case, the seller takes full responsibility, including transportation, customs clearance, and payment of all duties and taxes, and the buyer only needs to receive the goods at the final destination. This is the most favorable term for buyers.

2. Terms for Sea and Inland Waterway Transport Only

FAS (Free Alongside Ship) With this term, the seller delivers the goods next to the ship at the port and handles export clearance. The buyer takes over responsibility for loading, shipping, and further transportation.

FOB (Free On Board) In this scenario, the seller loads the goods onto the ship and handles export clearance, and the buyer assumes risk once the goods pass the ship’s rail. This is one of the most commonly used shipping terms.

CFR (Cost and Freight) Here, the seller pays for transportation to the destination port, and the buyer assumes risk once the goods are loaded onto the ship and handles unloading, import clearance, and further transport.

CIF (Cost, Insurance, and Freight) Similar to CFR, but in this case, the seller also provides insurance covering at least 110% of the goods’ value. The seller pays for shipping and insurance, and the buyer takes responsibility after loading the goods onto the vessel.

Expert Tips for Using Shipping Incoterms Effectively

1. Choose the Right Incoterm

Select a shipping Incoterm based on your specific needs. For example, if you’re handling a shipment by sea and need the seller to cover most of the shipping process, FOB (Free on Board) might be suitable, as it transfers responsibility once the goods are loaded onto the ship. Alternatively, if you need full control and want to manage transportation from start to finish, DDP (Delivered Duty Paid) Incoterms could be more fitting, as the seller covers everything until delivery at your door, including customs duties.

2. Be Clear in Documentation

When creating contracts or purchase orders, always mention the specific Incoterm, along with its version and location. For instance, instead of just saying "FOB," write "FOB Hamburg Incoterms 2020" to clarify the exact point of responsibility. This ensures no misunderstandings between both parties about when risks and costs transfer.

3. Understand All Costs

Every shipping Incoterm involves different costs. For example, under CIF (Cost, Insurance, Freight), the seller covers the shipping and insurance costs to the destination port. However, once the goods arrive, you may still need to pay terminal handling charges, customs fees, or even inland shipping. Always estimate these additional costs to avoid surprises and manage your budget.

4. Align with Payment Terms

Make sure your payment terms align with the responsibilities outlined in the Incoterm. If you’re using EXW (Ex Works), where the seller’s responsibility ends once the goods are available at their premises, you’ll likely need to pay for transport costs upfront. In contrast, CFR (Cost and Freight) means the seller pays for transport to the port, and your payment timing might match their shipping schedule.

5. Review Insurance Coverage

Understand the insurance obligations of the chosen Incoterm. Under CIF, the seller arranges insurance for the goods during transit. However, if you're using FOB, you may need to arrange your insurance once the goods are on board. Verify your policy covers potential risks, especially for high-value items like electronics or fragile products.

6. Look Beyond Price

While cost is important, other factors should guide your choice of Incoterm. For instance, if you're unfamiliar with customs procedures in a foreign country, opting for DDP (Delivered Duty Paid) might be beneficial since the seller handles all customs-related tasks, saving you from navigating complex regulations and potentially costly delays.

7. Stay Updated

Shipping Incoterms are updated periodically to reflect changes in global trade practices. For example, Incoterms 2020 changed FOB and CFR related to responsibility for loading and unloading costs. Always review the latest version, train your team, and adjust your contracts to reflect the updated rules.

Role of Drip Capital in Facilitating Smooth International Trade

Drip Capital helps businesses navigate potential challenges in international trade, such as cash flow gaps, financial risks, and logistical hurdles. Companies may encounter delayed payments, complex regulations, or operational inefficiencies that disrupt cross-border transactions. To address these, Drip Capital provides:

Tailored Financing Solutions for Incoterms

Drip provides financing based on the specific Incoterms used in a transaction.

  • For seller-friendly terms like EXW (Ex Works), Drip offers working capital upfront, allowing suppliers to produce goods without financial strain.
  • For buyer-friendly terms like DDP (Delivered Duty Paid), Drip finances buyers to cover shipping, customs, and duties until the goods reach their destination.

Risk Mitigation Drip aligns financing with risk transfer points in trade, ensuring businesses are protected at critical stages like shipment and delivery. They also offer guidance on insurance requirements, helping businesses safeguard against payment defaults, cargo damage, and unexpected losses.

Documentation Expertise Drip supports businesses with trade documentation, ensuring compliance with international regulations. This speeds up verification and enables quicker access to financing.

Logistics and Customs Support Through its global network, Drip connects businesses with reliable logistics partners and offers insights into customs procedures to minimize delays and compliance issues.

By combining financing, risk management, documentation support, and logistics expertise, Drip Capital makes international trade more accessible and efficient.

Shipping Incoterms are important rules in international trade that outline who is responsible for costs, risks, and tasks between buyers and sellers. Picking the right Incoterms for your business can help avoid disagreements, control costs, and build stronger global relationships. The best choice depends on your needs, capabilities, and how much risk you’re comfortable taking.

To make this easier, working with experts like Drip Capital can help you understand and use Incoterms effectively, ensuring smoother deals and better risk management. As global trade changes, staying informed and partnering with experienced professionals is key to success in international business.

Frequently Asked Questions

Drip Capital offers working capital solutions tailored to various Incoterms. For instance, under CIF Incoterms, where the seller covers costs, insurance, and freight, Drip can finance these expenses, ensuring liquidity until buyer payment is received.

2. Are Incoterms mandatory for international trade?

While not legally required, Incoterms are internationally recognized rules that define the responsibilities of sellers and buyers in export transactions. Their use is highly recommended to provide clarity and prevent disputes arising from differing interpretations across legal systems.

3. Who creates and updates Incoterms?

The International Chamber of Commerce (ICC) establishes and periodically updates Incoterms. First published in 1936, these terms have been revised to reflect evolving trade practices, with the latest version, Incoterms 2020, effective from January 1, 2020.

4. How do I choose the right Incoterm for my shipment?

Selecting the appropriate Incoterm depends on factors such as your shipping experience, relationship with the counterparty, access to shipping rates, regulatory considerations, and risk management capabilities. New exporters might opt for terms like EXW or FOB, while seasoned traders may prefer terms like CIF or DDP for greater control.

5. Which Incoterms are best suited for sea freight?

Incoterms specifically designed for sea and inland waterway transport include FAS, FOB, CFR, and CIF. FOB and CIF are commonly used, with FOB favoring buyers who manage their shipping and CIF benefiting buyers who prefer sellers to handle shipping arrangements.

6. What is the difference between FOB and CIF?

Under FOB (Free On Board), the seller's responsibility ends once goods are loaded onto the vessel, with the buyer covering shipping and insurance. In contrast, CIF (Cost, Insurance, and Freight) requires the seller to pay for shipping and insurance to the destination port, though the risk transfers to the buyer upon loading.