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What are Incoterms® and why are they important?
Note: Selecting Incoterms® for your trade is mandatory when using Boex. If you have any issues selecting the correct Incoterms® please feel free to ask for help via the chat below.
Incoterms®, short for International Commercial Terms, are standardized three-letter trade terms established by the International Chamber of Commerce (ICC) to clearly define the responsibilities of buyers and sellers in international and domestic trade contracts.
These terms specify who is responsible for tasks such as transportation, insurance, and customs clearance, as well as the point at which the risk of loss or damage to the goods transfers from the seller to the buyer. By providing clear definitions, Incoterms® help prevent misunderstandings and disputes in trade transactions.
The most recent version, Incoterms® 2020, includes 11 terms, each represented by a three-letter abbreviation. These terms are divided into two categories:
Rules for Any Mode of Transport:
EXW (Ex Works): The seller makes the goods available at their premises; the buyer is responsible for all transportation costs and risks from that point onward.
FCA (Free Carrier): The seller delivers the goods to a carrier or another party nominated by the buyer at the seller's premises or another named place; the buyer assumes responsibility from that point.
CPT (Carriage Paid To): The seller pays for carriage to the named place of destination; risk transfers to the buyer upon handing goods over to the first carrier.
CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also provides insurance coverage up to the named destination.
DAP (Delivered at Place): The seller delivers when the goods are placed at the disposal of the buyer at the named destination; the buyer is responsible for unloading.
DPU (Delivered at Place Unloaded): The seller delivers the goods, unloaded, at the named place; the buyer is responsible for import duties and further transportation.
DDP (Delivered Duty Paid): The seller bears all costs and risks, including import duties, delivering the goods to the buyer's premises or another named place.
Rules for Sea and Inland Waterway Transport:
FAS (Free Alongside Ship): The seller delivers when the goods are placed alongside the vessel at the named port of shipment; the buyer bears all costs and risks from that point.
FOB (Free On Board): The seller delivers the goods on board the vessel; risk transfers to the buyer once the goods are on board.
CFR (Cost and Freight): The seller pays for cost and freight to the named port of destination; risk transfers to the buyer upon loading.
CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also provides insurance coverage up to the named port of destination.
Understanding these terms is crucial for businesses engaged in trade, as they delineate the division of responsibilities, costs, and risks between buyers and sellers, facilitating smoother transactions and reducing the potential for disputes.
Incoterms® Boex uses:
By offering precise definitions, Incoterms® eliminates ambiguity, reduces misunderstandings, and helps prevent disputes which ensures smooth and efficient trade transactions.
These terms are important to know when you are creating your bills of exchange through Boex so that all parties understand the agreements and are on the same page. There are many specific Incoterms® but the ones that Boex will be using are as follows:
1. EXW (Ex Works)
BOE Issued After: The goods are made available at the seller's premises.
Available Documents:
Commercial Invoice: Proof of the sale.
Packing List: Details of the goods packed and ready for pickup.
Proforma Invoice (if issued earlier for payment purposes).
Since the buyer arranges transport and export, there may be no transport documents provided by the seller. The BOE formalizes payment obligations as the goods are made available for pickup, and the buyer assumes full responsibility from that point.
2. FCA (Free Carrier)
BOE Issued After: The goods are handed over to the carrier at the named place.
Available Documents:
Commercial Invoice.
Packing List.
Forwarder’s Cargo Receipt (FCR): Issued by the forwarder, confirming receipt of goods for transport.
Transport Document (if the seller arranges the carrier, e.g., a waybill).
The BOE might be issued after the goods are handed over to the carrier, with documents like the FCR or waybill serving as proof that the goods are in the buyer's possession via the carrier.
3. CPT (Carriage Paid To)
BOE Issued After: The goods are handed over to the first carrier.
Available Documents:
Commercial Invoice.
Packing List.
Forwarder’s Cargo Receipt (if a freight forwarder is involved).
Transport Document (e.g., Airway Bill or Bill of Lading).
The BOE is issued after the goods are handed to the carrier, and the seller is responsible for the transport to the named destination. The buyer assumes risk after this handover but has documentation for transport and proof of the goods' shipment.
4. CIP (Carriage and Insurance Paid To)
BOE Issued After: The goods are handed over to the first carrier.
Available Documents:
Commercial Invoice.
Packing List.
Insurance Certificate: Shows the seller has arranged insurance for the goods.
Transport Document (e.g., Airway Bill, Bill of Lading).
Forwarder’s Cargo Receipt (if applicable).
The BOE is issued after the goods are handed to the carrier, but the seller arranges transport and insurance. The buyer is responsible for the goods after this point, with documents confirming insurance and shipment.
5. DAP (Delivered at Place)
BOE Issued After: The goods are delivered to the named place, but before unloading.
Available Documents:
Commercial Invoice.
Packing List.
Transport Document (e.g., Airway Bill, Bill of Lading, or CMR for road transport).
Proof of Delivery (POD): When the goods reach the final delivery point.
The BOE is issued once the goods are delivered to the destination, ensuring the buyer commits to payment before unloading or further transport arrangements.
6. DDP (Delivered Duty Paid)
BOE Issued After: The goods are delivered to the buyer’s premises, fully cleared through customs.
Available Documents:
Commercial Invoice.
Packing List.
Proof of Delivery (POD).
Customs Clearance Documents: Proof that the seller has cleared the goods through customs and paid all import duties.
Transport Document (if needed for earlier stages).
The BOE can be issued at the final delivery stage since the seller is responsible for all transport and import costs. The buyer pays once the goods are fully delivered.
7. FOB (Free on Board)
BOE Issued After: The goods are loaded onto the vessel at the port of shipment.
Available Documents:
Commercial Invoice.
Packing List.
Bill of Lading (BL): Confirms that the goods are loaded on board.
Export Customs Declaration: Shows that the seller has cleared the goods for export.
The BOE would be issued after the goods are loaded onto the ship, with the Bill of Lading confirming shipment. The buyer assumes the risk from this point, and the BOE formalizes payment obligations.
8. CFR (Cost and Freight)
BOE Issued After: The goods are loaded onto the vessel.
Available Documents:
Commercial Invoice.
Packing List.
Bill of Lading: Confirms that the goods are onboard and details freight costs.
Export Customs Declaration.
The BOE is issued once the goods are on the ship. The seller arranges freight, and the buyer has documentation of the shipment for payment at the agreed terms.
9. CIF (Cost, Insurance, and Freight)
BOE Issued After: The goods are loaded onto the vessel.
Available Documents:
Commercial Invoice.
Packing List.
Bill of Lading.
Insurance Certificate: Confirms that insurance is arranged.
Export Customs Declaration.
A BOE is issued once the goods are onboard, with both freight and insurance arranged by the seller. The buyer commits to payment as the seller provides proof of shipment and insurance.
10. FAS (Free Alongside Ship)
BOE Issued After: The goods are placed alongside the vessel at the port of shipment.
Available Documents:
Commercial Invoice.
Packing List.
Receipt for Goods: Confirms that the goods are placed alongside the ship.
Export Customs Declaration.
The BOE is issued once the goods are placed alongside the ship, and the buyer assumes risk and cost from that point onward.
11. DPU (Delivered at Place Unloaded)
BOE Issued After: The goods are delivered and unloaded at the agreed destination place, ready for the buyer to collect.
Available Documents:
Commercial Invoice: Proof of the sale.
Packing List: Details of the goods as packed and shipped.
Transport Documents (e.g., CMR, AWB, B/L): Evidence of shipment arranged by the seller.
Delivery Note or Proof of Delivery (POD): Confirmation that goods have been unloaded at the named place.
Under DPU, the seller bears all costs and risks involved in delivering and unloading the goods at the named place of destination. The BOE is typically issued after the unloading is completed. The buyer is then responsible for import customs clearance, duties, and onward transport. This term places maximum obligation on the seller regarding delivery and unloading.
Summary of Shipping Documents by Incoterms®:
Commercial Invoice and Packing List: Available under all Incoterms® as essential documents for sale and shipment.
Transport Documents (Bill of Lading, Airway Bill, etc.): Available when the seller arranges transport or delivery (FOB, CFR, CIF, CPT, CIP, DAP, DDP).
Insurance Certificate: Available under CIF and CIP, where the seller arranges insurance.
Proof of Delivery: Available under DAP, DPU, and DDP, where delivery to the buyer's premises is required.
Export Customs Declaration: Available when the seller is responsible for export clearance (FOB, FAS, CIF, CFR).
The issuance of a BOE is supported by these documents, which provide the necessary proof of shipment, delivery, or insurance to ensure the buyer’s obligation to pay is secured.
If you still have any remaining questions on Incoterms®, don't hesitate to contact support at [email protected]