Full Form of CIF – Cost, Insurance, and Freight
Full Form of CIF is Cost, Insurance, and Freight. CIF can be regarded as an expense that includes costs, insurance, and freight, which is required to be borne by the seller of the goods until these goods are loaded onboard the vessel, and the liability of the concerned goods passes on to the buyer from the seller the moment the freight loads.
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For eg:
Source: Full Form of CIF (wallstreetmojo.com)
Characteristics
The characteristics of CIF are provided as follows:
- In a CIF contract, the costs and risks of ordered goods at two different points transfer from the seller to the buyer.
- The liability of the costs and risks gets transferred to the buyer of the goods as soon as the cargo reaches the mutually agreed port mentioned in the contract.
- The seller must pay for the cost, freight, and insurance of the ordered goods to be loaded onboard the vessel. This means that even though the risk transfers from the seller to the buyer, it is the former who is responsible for taking care of the costs of insurance and freightCosts Of Insurance And FreightCost, Insurance and Freight (CIF) are the expenditures borne by the seller to cover not just the regular costs but also the charges on the freight and insurance for securing the losses that may arise out of probable damage or theft of a customer’s order.read more from the export port to the mutually decided destined port.
How Does it Work?
- Cost, insurance, and freight put an obligation upon the seller concerning organizing ordered goods to the destined port mutually agreed between him and the buyer. It is used only in the case of goods that are transported through waterways. The destined port mutually agreed by both the seller and the buyer must be accessible and not landlocked.
- The seller of the goods in a CIF is responsible for managing formalities concerning the clearance of export customs at the start point, entering into CIF contracts with the buyer of the ordered goods, arrangement, and payment concerning the transportation of the ordered goods from the origin to the destined port, payment, and settlement of the costs pertaining to loading and unloading of the ordered goods from the vessel, obtaining and paying for the insurance of the ordered goods, special documentation, etc.
- However, It puts an obligation on the seller instead of any restrictions. The obligations of the buyer of the ordered goods in CIF contracts are taking care of the import customs clearance as well as relevant formalities, special documentation, being liable for the costs once the goods reach the mutually agreed port, etc.
Example
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Source: Full Form of CIF (wallstreetmojo.com)
ABC Limited ordered thousand washing machines from Whirlpool using cost, insurance, and freight to the XYZ port. Whirlpool delivered ABC’s order of thousand washing machines to the port and loaded it on board the vessel. As soon as the washing machines were loaded onboard the vessel, ABC Limited became responsible for all the costs concerned with getting the order delivered to the XYZ port.
But when the ordered goods were in transit, there was damage caused to a few numbers of washing machines due to inappropriate handling. ABC Limited placed the order using cost, insurance, and freight; therefore, it is not responsible for bearing the losses caused by such damage to ordered goods in transitGoods In TransitGoods in Transit are the inventory items purchased by the buyer and shipped by the seller. However, the goods are on the way and yet to reach the intended purchaser. Therefore, such inventory items are recorded as neither available at the seller’s place nor the purchaser’s site.read more. Whirlpool will be responsible for bearing all the losses caused by damage to washing machines during transit of the same to the XYZ port.
Difference between Cost Insurance Freight and FOB
FOB DestinationFOB DestinationFree On Board Destination implies that the ownership of the goods supplied from a foreign country is transferred to the purchaser of the goods only when the goods reach the buyer's specified location. Hence, the seller bears all the goods losses that occur during the transit.read more stands for free on board, whereas CIF is a short form used for cost, insurance, and freight. The main difference between cost, insurance, and freight and free onboard is that the former is preferred by the buyer or the importer of the goods while the latter is preferred by the seller or the exporter of the goods. In a CIF contract, the seller pays the costs, insurance, and freight to transport the goods to its destination whereas, in a FOBFOBFOB is an abbreviation for Freight On Board. It is also referred to as free on board. FOB is a legal term that refers to the point at which the risk and cost of the goods being shipped are transferred from the selling party to the buying party.read more contract, the seller themselves loads the cargo onboard the vessel chosen by the importer, and the costs and risks involved are divided as soon as the ship starts to sail.
Advantages
- The seller or the exporter of the ordered goods gets the opportunity to make more profits as he gets to make arrangements for freight and insurance.
- The seller or the exporter of the ordered goods get to retain the right to control the cargo’s disposal until and unless the payment is cleared.
- The seller or the exporter of the ordered goods will not get to bear the risks of loss or damage caused to cargo when the same was in transit.
- The buyer or the importer of the cargo will be free from any stress concerning the loss or damage caused to the ordered goods, and he or she can relax until the same gets shipped to the destined port mutually decided in the CIF contract.
Disadvantages
The most significant disadvantage of a CIF could be that the potential risks of loss or damage caused to the goods in transit are transferred to the importer or the buyer during the contract. In a CIF contract, the risk passes on to the buyer as soon as they make the payment and take the document. The exporter might sometimes take this loophole to their advantage and might load defective or damaged goods. If the goods are lost due to some mishaps while in transit, then the number of goods lost might go unascertained, and the buyer would ultimately bear the impact of the same.
Conclusion
CIF is the most common method used in import as well as export shipping. It is the short form used to address cost, insurance, and freight. CIF can be defined as a mechanism under which the seller bears the costs, insurance, and freight of the ordered goods until the cargo arrives at its destination port that is mutually decided in the agreement. The goods’ liability upon being shipped to the destination port passes on from the seller (exporter) to the buyer (importer). To conclude, it can be said that it is an expense that is incurred by the exporter against potential risks such as loss or damage to ordered goods while the same is in transit to the port mutually decided by the parties in the sales contract.
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This has been a guide to the Full Form of CIF, i.e. (Cost, Insurance, and Freight) and its definition. Here we discuss the characteristics and example of CIF along with their differences, advantages, and disadvantages. You may refer to the following articles to learn more about finance –
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