3 Things You Must Look Out for Before incorporating Incoterms Into Your Business

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3 Things You Must Look Out for Before incorporating Incoterms Into Your Business

“Incoterms” is another name for International Commercial Terms. These are the popular terms that are used in the shipping of goods and services. The Incoterms are used worldwide and relate to the sales contract. Although they are just terms, they are used to define many important obligations and responsibilities. Hence, it is very important to understand and use them carefully. Below are some of the important things you must look out for before using the right Incoterms in your business.

What Is The Significance of Incoterms 2020?

The Incoterms are used to define a multitude of obligations and responsibilities. The most important ones are as follows:

Point of delivery – This part defines the location where the shipment will be transferred from the supplier to the customer.

The Party Responsible For The Shipping Costs – This part describes which party will pay for the freight charges. The command used for this obligation is generally known as  Freight Collect or Freight Prepaid.

Other Export /Import requirements – Each Incoterm describes whether the shipper or the buyer is responsible for covering the import/export charges of the freight.

The Party Responsible For Freight Insurance – Some Incoterms require freight insurance. These define who will cover the insurance cost.

Things To Look Out For Before incorporating Incoterms 2020 Into Your Business

1. Learn and Understand the Incoterm Responsibilities

Not all the Incoterms are meant for all kinds of shipments. Although all Incoterms can be used for waterway shipments, some are only restricted for waterway shipments and can’t be used for land or air transport. Click to learn more.

Understanding these differences is very important, because if by any chance you use a waterway-specific Incoterm and ship using land and airway, then you might have to pay heavy penalties.

Here are the 2020 Incoterms that can be used for all types of shipping methods:

  • FCA – Free Carrier
  • EXW- Ex Works /Ex-Warehouse
  • CIP- Carriage and Insurance Paid To
  • CPT- Carriage Paid To
  • DDP- Delivered Duty Paid
  • DPU- Delivered At Place Unloaded
  • DAP- Delivered At Place

Here are the Incoterms that can be used for sea and Inland transport:

  • FAS – Free Alongside Ship
  • CFR– Cost and Freight
  • FOB – Free on Board
  • CIF – Cost and Insurance Freight

2. Know The Difference Between Freight Prepaid and Freight Collect

Freight Collect and Freight Prepaid are the terms that are used by the sellers and buyers at the time of planning international freight. When a shipper uses the term “Freight Collect”, they refer to one among the four terms that require the customer to collect and pay for the complete freight charges. Below are the Incoterms that comes under Freight Collect:

  • FCA- Free Carrier
  • EXW – Ex Works or Ex-Warehouse
  • FOB- Free on Board
  • FAS – Free Alongside Ship

Similarly, when the term “Freight Prepaid” is used, it indicates that the shipper will cover the freight charges. Here are the Incoterms associated with the Freight Prepaid:

  • CIF- Cost, Insurance and Freight
  • CFR – Cost and Freight
  • CPT – Carriage Paid To
  • DAP- Delivered At Place
  • CIP – Carriage and Insurance Paid To
  • DDP- Delivered Duty Paid
  • DPU – Delivered At Place Unloaded

3.Type of Insurance When Shipping Under CIP and CIF Incoterms 2020

The CIF (Cost, Insurance and Freight) Incoterm needs an insurance policy that offers a minimum cover of the Institute Cargo Clause [C].

The CIP (Carriage and Insurance Paid To) needs an insurance policy that offers a minimum cover of ICC (A).

These are the three important things to look out for before using any Incoterm for your business. By understanding the meaning and responsibilities associated with the Incoterms in 2020, the communication between the buyers and sellers remains clear and concise.

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