Understanding Incoterms

MVX
5 min readMay 26, 2022

A quick guide to the most important shipping Incoterms

Incoterms Explained

Think of the way human language works. Can you imagine its importance in helping you communicate with people, understand concepts, and do business? When you find yourself among people of different languages, you often feel dismayed, even at risk, because your inability to understand and communicate with them exposes your limitations. You feel like a fish out of water.

International commercial terms (Incoterms) are the language of global trade. They are rules set and administered by the International Chamber of Commerce (ICC) to make global commerce easier by helping businesses understand and apply the most widely used global trade terms. Incoterms clarify the responsibilities of buyers and sellers for the exchange of goods in international trade transactions.

The ICC developed Incoterms in 1936 and update them periodically to keep up with changing trade landscape. Incoterms spell out the obligations of different parties in trade transactions, are adopted by millions of businesses around the world and are recognized by courts and other authorities globally.

Why are Incoterms Important?

International trade would be confusing without Incoterms. Incoterms, as a form of a trade language, eliminate trade confusion, lessen trade disputes and risks, and provide a set of universal guidelines that enable the seamless conduct of trade across the world. The rules define the tasks, costs, and risks buyers and sellers in trade transactions bear.

Trade activities that require Incoterms include labelling a shipment for transport, filling out a purchase order, creating a packing list for a shipment, completing a certificate of origin, or documenting a free carrier agreement (FCA).

By understanding Incoterms better, you’d have equipped yourself with the universal trade language that helps you trade in any part of the world with ease.

What are the most important Incoterms?

There are generally eleven (11) Incoterms in use, classified into two main categories based on modes of transport. The first is the general category that applies to any mode of transportation while the second category is applicable to sea and inland waterway transport.

Category One: Incoterm for Any Transport Mode

The common Incoterms for any mode of transport are:

EXW (Ex Works) — this means that the seller, or exporter, delivers the goods to the buyer at the seller’s premises or at any identified location (e.g. a warehouse or factory). The buy shoulders the transport costs, duties, and insurance, and also bears risks of any losses incurred after the seller places the goods at the disposal of the buyer.

FCA (Free Carrier) — The seller, or exporter, clears the goods for export and hands them to the carrier or any other party nominated by the buyer at the seller’s place of business or other agreed upon destinations. With the FCA incoterms, the parties involved in a trade transaction are advised to identify and clearly agree on the exact point of delivery at the named place, as the risks pass to the buyer at that point.

CPT (Carriage Paid To) — this means that the seller/exporter bears responsibility for arranging carriage to the nominated carrier or place of delivery. The risks of losses transfer to the buyer immediately at the nominated point of delivery and the buyer must insure the goods from that point.

CIP (Carriage and Insurance Paid To) — this incoterm means that seller/exporter bears responsibility for arranging carriage to the nominated carrier or place of delivery, and also shoulders carriage and insurance cost to the named place of delivery. The risks pass to the buyer at that point of delivery.

DAP (Delivered at Place) — under this incoterm, the seller/exporter bears responsibility for arranging carriage and delivering the goods to the nominated place of delivery, ready for unloading from the arriving means of transport. The risks pass to the buyer when the goods are available for unloading at the named place. Unloading is at the buyer/exporter’s risk.

DPU (Delivered at Place Unloaded) — The seller/exporter is responsible for arranging carriage and delivering the goods to the nominated place of delivery, ready for unloading from the arriving means of transport. The risk of unloading is on the seller and transfers to the buyer after the seller completes unloading the goods at the agreed delivery point.

DDP (Delivered Duty Paid) — The seller/exporter is responsible for arranging carriage and delivering the goods to the nominated place of delivery. Also, the seller/exporter is obligated to clear the goods not only for import but also for export and bear the costs of all duties and taxes.

Category Two: Incoterms Rules for Sea and Inland Waterway Transport

There are four incoterms for sea and inland waterway transport. They are:

FAS (Free Alongside Ship) — in this arrangement, the seller delivers the goods, clears them for export, and places them alongside the vessel at a named port for export. The buyer bears the costs and risk of loading the goods onto the vessel and paying all the costs of shipping goods to the final destination.

FOB (Free on Board) — this means the seller delivers the goods, clears them for export, and loads them on board the vessel at the named port for export. After loading the goods on board, the risks transfer to the buyer from that point.

CFR (Cost and Freight) — seller/exporter is responsible for clearing the goods and delivering them on board the vessel for export and paying international freight charges. The buyer assumes responsibility for the carriage risks, pays for insurance, unloads the goods, and takes charge of delivery to their final destination.

CIF (Cost Insurance and Freight) — this Incoterm describes the contract that holds the seller responsible for transportation of goods up to the port of destination, customs clearance, carriage fees, and minimum insurance up to the destination. The risk transfers to the buyer after the goods have been loaded onto the vessel for main carriage and is responsible for import clearance and the cost of transporting the goods from the destination port to the final destination.

What Incoterms Don’t Cover

  • They don’t cover the transfer of ownership between a seller and a buyer.
  • They don’t cover payments
  • They don’t identify the goods being sold or the list the contract price
  • They don’t cover breach of contract
  • They don’t address all the conditions of sale
  • They don’t identify the document that a seller or buyer must provide.

Final Notes

Incoterms are important for trade to flow smoothly between buyers and sellers across the world. Without it, it would be impossible for global trade to accelerate and deliver the value it was designed for. That is why at MVX, we have built the technology and capacity to help businesses focused on the African market access and manage international trade transactions online. Our expertise in this area spans years, and we have helped 300+ big and medium-sized organizations to trade around the world easily and with efficiency.

Get the support you need today. Visit www.mvx.trade to get started!

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MVX

MVX is a tech-powered end-to-end trade company, financing transactions and handling shipments for SMEs around Africa.