Recognising these complexities, the International Chamber of Commerce (ICC) created Incoterms, certain communication rules that guide merchants through international shipping. Among these, the Cost and Freight (CFR) is a crucial acronym that answers questions like who pays for what and who bears the brunt and divides the line between the seller’s and buyer’s responsibilities.
In this comprehensive guide, we dive deep into the depths of CFR, exploring each facet of this Incoterm. From the responsibilities of sellers and buyers, we’ll talk about everything you need to know.
What is Cost and Freight Incoterm (CFR)?
CFR, for Cost and Freight, represents a set of obligations and responsibilities integral to the seller within an international trade contract. This Incoterm is tailored specifically for sea and ocean freight. Under CFR, the seller is mandated to orchestrate the carriage of goods by sea to a designated destination port. This responsibility encompasses all associated costs until the goods are safely loaded onto the shipping vessel.
CFR is tailored for the transportation of bulk and non-containerised cargo. It stands distinct from other Incoterms like CPT (Carriage Paid To), which are more suited for containerised cargo or multiple modes of transportation. For businesses in the e-commerce sphere, comprehending the nuances of CFR can be a crucial factor in successful order fulfillment.
What are the Seller’s Responsibilities in CFR?
Delivering Goods to the Buyer’s Specified Port
In CFR, the seller’s role is to ensure the goods reach the buyer’s chosen port within the agreed delivery schedules and in coordination with shipping lines. This step is pivotal in ensuring a seamless delivery process, where the seller must adeptly fulfill the responsibilities of maritime logistics, selecting and liaising with shipping companies to ensure that the journey from warehouse to port is smooth and unimpeded.
Paying for Transportation to the Destination Port
The financial burden of transporting goods to the destination port rests squarely on the seller’s shoulders under CFR. This encompasses all ocean freight transportation expenses, ensuring that the journey across seas doesn’t add any unexpected costs to the buyer’s ledger. Here, the seller should strategically negotiate and manage freight fees and contracts, which demands keen insight into the fluctuating dynamics of maritime transport costs.
Clearing Goods for Export
Before the goods embark on their journey, they must clear the hurdles of export formalities. The seller’s responsibilities include dealing with customs procedures, getting export import code, and ensuring that all the necessary documentation for export clearance is meticulously prepared and presented. This step is crucial in averting delays and legal complications that could arise from compliance oversights.
Paying for Unloading at the Destination Port
One of the more nuanced aspects of CFR is the handling of unloading costs at the destination port. The seller must understand and manage the financial implications of unloading, ensuring that these costs are either factored into the contract or explicitly stated as the buyer’s responsibility. This aspect of CFR requires clear contractual communication to avoid misunderstandings.
Export Packaging and Marking
The seller’s responsibility also extends into packaging and marking for export. This seller, under CFR, ensures that the goods are not only securely packed for their ocean journey but also clearly and accurately labeled.
Pre-Carriage to Terminal
Transporting goods from the warehouse to the port of departure, known as pre-carriage, is another critical responsibility of the seller. It requires managing the logistics and costs associated with moving goods to the port, ensuring that this leg of the journey is executed efficiently and cost-effectively.
Pre-Shipment Inspection
Quality assurance through pre-shipment inspection is a vital seller duty under CFR. This step is about ensuring that the goods meet not only the buyer’s standards but also the regulatory requirements of the importing country.
What are the Buyer’s Responsibilities in CFR
Paying for the Goods
In CFR, the financial responsibility passes firmly into the buyer’s hands. The buyer must ensure the payment transaction of purchasing goods aligns with the terms in the sales contract. The buyer must skillfully arrange finances to cover the cost of the goods and the shipping expenses incurred up to the destination port. This process demands both foresight and fiscal acumen.
Delivery to the Final Destination
Once the ship docks at the destination port, the responsibility for delivery enters the buyer’s domain. This involves arranging the onward transportation of goods from the port to their final stopping point. The buyer should engage with local carriers, understand regional logistics, and ensure that this final leg of the journey is efficient and trouble-free.
Insurance Coverage of Goods
In the CFR Incoterm, the shipping insurance of the goods rests with the buyer from the moment they are loaded onto the vessel. This is a critical aspect of risk management. Selecting the right insurance policy is not just about ticking a box. It’s about safeguarding the delivery of the goods across the seas and protecting the buyer’s investment from potential loss or damage.
Import Clearance and Duties
The buyer clears the import duties. This involves comprehensively handling all procedures and documentation required for the goods to enter the destination country legally. It’s a task that requires effective communication with customs authorities and a thorough understanding of the import process.
Customs Handling Fees at Destination
The buyer must also be adept at dealing with the applicable customs handling fees in the destination country. It requires a keen awareness of local regulations and a strategic approach to cost management, ensuring these fees are factored into the overall financial planning of the import.
Payment of Duties and Taxes
Lastly, the buyer is responsible for the financial implications of importing goods, including paying all relevant duties and taxes. The buyer must ensure adherence to all tax regulations and obligations, a step crucial to avoiding legal and financial repercussions.
Advantages of CFR for Online Businesses
- Under CFR, the seller is responsible for transportation costs up to the destination port. This clarity in cost allocation allows online businesses, especially those operating on tight budgets, to strategise their financial planning more effectively.
- CFR greatly minimises the risk of unexpected or hidden shipping fees.
- CFR delineates a clear demarcation of responsibilities between the seller and the buyer. For online businesses, this clarity is invaluable.
- By offloading the complexities of shipping logistics to the seller, online businesses can focus more on their core activities, such as marketing, customer service, and product development.
- Under CFR, the risk transfers to the buyer only after the goods are loaded onto the vessel at the origin port. The transfer of risk at a clearly defined point provides predictability and control in international shipping.
- While CFR does not obligate the seller to provide insurance, it gives the buyer the flexibility to arrange coverage that best fits their needs.
Disadvantages of CFR for Online Businesses
- One of the primary challenges of CFR for online businesses lies in the shift of risk to the buyer as soon as the goods are loaded onto the vessel at the port of shipment.
- Although CFR allows buyers the flexibility to arrange for their insurance, this also places the burden on them to secure comprehensive coverage.
- While the seller covers the transportation costs to the destination port, the buyer is responsible for all subsequent expenses, including unloading, import duties, taxes, and transportation to the final destination.
- For eCommerce businesses, particularly those operating in highly competitive markets, these added expenses can affect pricing strategies.
When businesses should use CFR
For businesses, particularly those in the eCommerce realm, employing CFR over other Incoterms can have significant implications. CFR shines in scenarios involving bulk and non-containerised cargo. This could include raw materials, agricultural products, or large machinery, typically not transported in standard shipping containers.
Moreover, businesses dealing with goods that must be loaded directly onto the ship rather than being stored and containerised find CFR particularly advantageous. This direct loading minimises handling and potential damage, making CFR a strategic fit for cargo types.
Conclusion
CFR offers a blend of cost efficiency, risk distribution, and logistical clarity for online businesses, particularly those venturing into or expanding within the global market. CFR, like all Incoterms, is a strategic tool that can offer businesses a competitive edge when understood and applied astutely. Many businesses have leveraged NimbusPost’s tech-enabled platform for hassle-free freight forwarding and finding the best international courier services to gain a competitive edge. So why don’t you give it a try?
FAQs
What is the freight cost?
Freight cost is the amount paid to transport goods from one location to another. Freight costs include the cost of transport, fuel charges, local taxes, special charges, handling charges, and emergency costs.
Is CFR cheaper than CIF?
In case of a good deal with an insurance company, it may be cheaper and safer for buyers to ship under the CFR Incoterm than under CIF.
How is the CFR price calculated?
CFR price is calculated by considering the Cost of goods, labour, packaging, labelling, insurance, transportation, customs, checks, paperwork, taxes, and port fees.
CFR price can also be calculated as CFR Price = FOB Price + Shipping
What is the difference between CFR and FOB?
FOB: The seller is responsible for the product until it is loaded onboard a shipping vessel. Once the goods are loaded onto the vessel, the buyer takes responsibility.
CFR: The seller pays for freight to the destination port, but the buyer assumes risk once the goods are loaded onto the ship.
What is the difference between CIF and CFR?
CIF: CIF stands for “Cost, Insurance, and Freight.” CIF includes all the same responsibilities as CFR, but the seller must also purchase insurance for the goods during transport.
CFR: CFR stands for “Cost and Freight”. CFR requires the seller to transport goods by sea to a required port. CFR does not include any insurance.
