- CFR The Definition
- When CFR Is Used
- Risk Transfer in CFR
- The Breakdown of Expenses in CFR
- The buyer's expenses
- The seller's expenses
- CFR vs CIF Differences in insurance
Dealing with logistics can be tricky. Knowing your incoterms correctly can separate right from wrong if you're running a business. But if you're a regular consumer, do you even need to know international commercial terms? The truth is, probably not, but you may understand the shipping process better.
When you come across CFR in an invoice, you may wonder what it is. It's an abbreviation indicating whose responsibility it is to cover the shipping cost, duty, and taxes. Learning more about CFR will educate you to become a more intelligent consumer.
So follow along as we unmask this logistics term and discover its details.
CFR: The Definition
CFR is an international commercial term short for "Cost And Freight." This term defines the seller's obligation to deliver the goods to the destination. It also specifies what precise responsibilities belong to the buyer.
In short, CFR is when the seller delivers sold commodities to the named destination port. The seller is responsible for calculating and setting the product's cost and covering the freight charges to the destination port. Furthermore, CFR transports goods using a vessel nominated by the seller at the origin port.
There are two primary components of Cost And Freight, namely:
- Cost of goods: This is the price the buyer pays to the seller for the actual products being traded. The cost usually includes the production or purchase cost of the goods themselves. The seller sets the price.
- Cost of freight: These charges encompass all expenses of moving the products from the seller's location to the destination port. The seller bears all costs related to the shipping, such as export tax and duty, packaging, terminal handling, loading and unloading, and delivery.
When CFR Is Used
Sellers using sea freight shipments are the ones benefiting most highly from CFR. This international trade term is especially suitable for sea shipments because the seller is only responsible for the above primary components. Therefore, the seller can offer more competitive pricing overall for their products.
If the seller is also well-versed in export processes, CFR may suit them. CFR requires knowledge of export customs clearance and handling of goods in the main carriage. A seller's expertise in these matters will allow them to take full advantage of CFR.
Meanwhile, the buyer has more control over the products at the destination when they arrive.
Transparency in pricing, where the cost of reasonable and freight charges are explicitly stated, is also beneficial for both the seller and the buyer. With pricing transparency, neither side will feel shortchanged. This may contribute to further trust, resulting in a repeat of trade between both parties.
Risk Transfer in CFR
In a Cost And Freight term, risk transfers refer to the point in the shipping process where the responsibility and risk associated with the goods move from the seller to the buyer. In CFR, this transfer happens when the goods are loaded onto the vessel at the origin port.
Here's a breakdown of risk transfer in CFR.
- The seller bears the risk: Up until the products are loaded onto a ship at the port of origin, the seller pays the risk of loss and damage. This means the seller must be responsible if an incident occurs during transportation to the port or the loading process.
- Buyer bears the risk: The risk switches to the buyer after the goods are on board the ship at the origin port. From this point onward, until it reaches the destination, the buyer assumes the risk of goods.
Although the seller still handles responsibilities associated with costs throughout the journey to the destination, the risk shifts from seller to buyer on the initial loading.
That's why it's crucial to note that, in CFR, the concept of risk transfer differs from title and ownership transfer. The title and ownership of goods may have different conditions based on the buyer's and seller's sales contract or agreement.
The Breakdown of Expenses in CFR
In a Cost And Freight arrangement, sellers and buyers must bear certain costs. The terms in CFR lay out the breakdown of those expenses.
The buyer's expenses
The buyer is responsible for expenses starting from the seller's location, where the goods are housed, packaged, and then delivered to the port of origin. Here are all the components of the buyer's responsibilities in CFR.
- Goods delivery: Delivering the goods from the warehouse to the vessel in the port of origin
- Cost of goods: Setting the price of the products sold, including the shipment cost
- Freight charges: The price of arranging shipment and actual shipping of the goods to the destination port
- Export customs clearance: Procedures necessary to clear the goods for sale and delivery out of the country with all the required paperwork
- Terminal handling charges (at origin): Charges associated with goods handling at the port of origin, up to the point of loading onto the vessel
- Loading onto vessel: Process for (including cost of) stowing the goods securely for maritime shipping
- Documentation: Providing the buyer with all necessary documents like commercial invoice and packing list that the buyer will require to claim the goods at the destination
- Delivery notice: The seller may be required to give the buyer notice that the goods have been delivered and ready for pick-up at the destination
The seller's expenses
Meanwhile, the buyer also has key responsibilities. Here is the breakdown:
- Unloading at destination: Costs associated with unloading the goods from the vessel at the destination port
- Terminal handling charges (at destination): Charges associated with goods handling at the port of destination as soon as the unloading from the vessel happens
- Import customs clearance: Procedures necessary to clear the customs, according to the customs regulation, at the destination country
- Duties and taxes: Payment of any import duties, taxes, and other charges that apply to the goods' entry into the destination country
- Final destination delivery: Arranging and paying for the good's transit from the destination port to the last address, usually via inland transport. It may also include further unloading and handling at the final destination.
- Insurance (optional): The buyer can choose to purchase additional insurance coverage for the goods during transport (see the differences between CFR and CIF below)
- Notification to seller: The buyer may need to inform the seller when the goods have been successfully unloaded and received at the destination
CFR vs. CIF: Differences in insurance
If there's another incoterm similar to CFR, it is CIF. CIF stands for Cost, Insurance, And Freight. The seller's and the buyer's responsibilities are the same in both terms. However, the main difference is the insurance part.
In CFR, the cargo insurance is negotiable between the buyer and the seller. Before the shipment, they must agree on who will bear the insurance coverage. However, under CFR terms, the seller is not obligated to cover the insurance cost. The buyer is usually responsible for the insurance coverage.
On the other hand, in CIF, the cargo insurance falls under the seller's responsibilities. The seller must obtain and pay for insurance coverage for the goods during transit. This insurance protects against any risk to the goods. The seller will then include the insurance cost in the overall pricing.
The buyer can benefit from CIF as the insurance is already bundled with freight charges and product costs.
CFR is a term that specifies the seller's cost responsibilities of delivering the goods from their original location to the destination port. Until the goods are deposited on the ship at the origin, the seller bears the risks. However, the buyer assumes all the risk after the ship departs with the goods. After the vessel arrives at the destination, all costs are the buyer's responsibility.
Knowing what incoterms are used in logistics can help process your shipment more smoothly. But if you're worried about moving any goods, leave it to A1 Auto Transport. We have professional movers to help you deal with the logistics. Get your free quote today.