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.
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 is required to pay for the cost, freight, and insurance of the ordered goods that are to be loaded on board the vessel. This means that even though the risk transfers from the seller to the buyer yet it is the former who is responsible for taking care of the costs pertaining to insurance and freight from the export port to the mutually decided destined port.
How Does it Work?
- Cost, insurance and freight put an obligation upon the seller with respect to organizing the delivery of 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 an accessible destination and not landlocked.
- The seller of the goods in a CIF is responsible for managing formalities with respect to 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
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 the same onboard the vessel. As soon as the washing machines were loaded onboard the vessel, ABC Limited became responsible for all the costs that are 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 as a result of inappropriate handling. As ABC Limited placed the order using cost, insurance and freight therefore, it is not responsible for bearing the losses cause out of such damage to ordered goods in transit. Whirlpool will be responsible for bearing all the losses caused as a result of damage to washing machines during transit of the same to the XYZ port.
Difference between Cost Insurance Freight and FOB
FOB Destination stands for free onboard whereas CIF is the short form used for cost, insurance, and freight. The main difference between cost, insurance, and freight and free onboard is the fact 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 in order to transport the goods to its destination whereas, in a FOB 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 disposal of the cargo 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 during the time 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 simply 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 the fact 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 he or she makes the payment and takes the document. The exporter might sometimes take this loophole to his or her advantage and might load defective or damaged goods and if the goods are lost as a result of some mishaps while in transit then the number of goods lost might go unascertained and the impact of the same would be ultimately borne by the buyer.
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 costs, insurance, and freight of the ordered goods are borne by the seller until the cargo arrives at its destination port that is mutually decided in the agreement. The liability of the goods 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 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 –
