Essential Shipping Terms Every Business Should Know

Knowing exactly what a shipping term means and is used for, will help you avoid any issues when exporting products internationally. You need to understand who is responsible for international delivery.

Shipping terms, also known as incoterms or International Commercial Terms, are created by the International Chamber of Commerce in 1939 which is used when exporting goods overseas. It can be made easier for businesses to communicate effectively when exporting goods around the world by using incoterms. It is clearly outlined in the shipping terms that who is responsible for each task involved in a delivery and what is expected from both parties. So, it act as a contract between them. The person who is responsible to cover the cost of exporting goods abroad including customs clearance, duties, and freight is mentioned in shipping terms. Sometimes, all costs will be covered by the seller but mostly it will be covered by the buyer.

Shipping terms carries all the details about the person responsible for arranging transport and the carrier; the person needs to cover the cost of transport and where and when the goods will be transferred from the seller to the buyer.

There are three benefits of using shipping terms. These include:

Trading overseas becomes easier when using Shipping terms. Exporting goods and trading on a global scale is much simpler and straightforward process when sellers, freight companies, and buyers understand what shipping terms are, what they represent, and how to use them correctly. Disputes and disruptions to the supply chain can be avoided in the distribution center and the shipping recipient, when using shipping terms correctly. The key to a successful international business can be achieved by the help of shipping terms as it involves a steady flow of cash, stock ready to ship, and excellent customer service.

Shipping terms plays an important role when you want to have an edge over your competitors. Shipping terms can ensure goods are delivered on time and payment is received when they are effectively used which provides a competitive advantage for the businesses involved in the entire overseas supply chain. This couldn't encourage bribery and unfair business practices because a single government will not be able to change shipping terms and regulations. Penalties, fines, and criminal activity can be avoided by everyone using a standardized set of terms and terminology.

Regular business terms and phrases can often be misunderstood between sellers and buyers. In addition, language barriers with can also cause communication issues when you start trading overseas. Therefore, it is best for carriers and buyers to use standardized terminologies such as incoterms. There will be no error or confusion about the role, responsibility, and management of each party by using the same terms when exporting goods abroad and trading internationally. Complete peace of mind can be provided to all parties involved with shipping terms when sending goods from one location to another.

The most popular Shipping terms in global trade are:

FCA or free carrier shipping term says the seller to deliver the products to a certain destination, to the carrier which is chosen by the buyer. The loading and unloading requirements in the first transport will be determined by this destination. The sellers are liable for the load if delivery is made on the premises of the seller. The buyer is responsible for unloading the shipment if the delivery takes place elsewhere. The seller will take care of the export customs clearance according to this shipping term. The buyer can now instruct its carrier to issue a bill of landing with an on-board notation to the seller as per a new rule came into force in 2010, so that they may satisfy the terms of a letter of credit.

The seller will deliver the goods to their own warehouse or factory for the buyer to pick up in EXW or Ex Works shipping term. The buyer is responsible for all expenses and risks involved as the seller neither load the goods for the buyer or is involved in export clearance.

DPU refers to risk and responsibility. The seller is responsible for delivering the goods unloaded in the country of destination. The transportation risk is then passed from the seller to the buyer when delivery is made and completed. The seller will handle the export customs clearance whereas import customs clearance and any tariffs are paid by the buyer.

When the seller contracts and pays for transportation to the delivery destination in the country of buyer, it is known as CPT. The seller is no longer responsible for the items and all risk is passed over to the buyer once the goods are received by the first carrier in the chain. The seller will handle the export customs clearance.

CIP means the seller is also responsible for transport and shipping insurance. A higher level of insurance coverage, which is at least 110% of the value of goods need to be purchased by the seller. This is detailed in Clause A of the Institute of Cargo Clauses.

The goods must be delivered by the seller to the country specified by the buyer, and the items must be unloaded in a place other than a transport infrastructure or terminal as per DPA. Once delivery has been completed, the risk of transporting the goods moves from the seller to the buyer. The import customs clearance and tariffs are paid by the buyer whereas export customs clearance is completed by the seller.

The seller should deliver the goods, which are ready for unloading, at the place of destination requested by the buyer as per this shipping term. Usually, this is a factory or warehouse owned by the buyer. The seller will be responsible for handling all risks and costs, including customs fees such as clearance of import and export.

The seller should deliver the goods with a vessel at the port of destination as per FAS. All costs and associated risks are passed over to the buyer once the goods are delivered. Customs clearance will be handled by the seller.

It is the responsibility of the seller to deliver goods on board the ship, at the port of shipment when shipping goods overseas as per FOB. The buyer will choose to ship and pay for freight. All the associated risk of transportation will move from the seller to the buyer after the goods are delivered and are safely onboard the ship. Export customs clearance will be handled by the seller with FOB.

The seller will be responsible for freight to the port of destination as per CFR. The risk of any loss or damage to the goods passes from the seller to the buyer after the goods are loaded onto the ship at the shipment port. The seller will be responsibility for export customs clearance in this case.

The same obligations as CFR are applied to the seller when using the shipping term CIF. The insurance coverage for transportation is only needed at a basic level which must be provided and paid by the seller.

LCL is used when goods are exported overseas and to a named port. Generally, small ocean freight shipment is transported using LCL when the shipper does not contract for a full container due to the low quantity of goods. A consolidation may be created by  a freight forwarder by putting together multiple LCL shipments before gating in at the container yard at the named port or place of destination.

Although, international sellers must be aware of all these shipping terms, they may not need to use all of them while exporting goods overseas. The most commonly used shipping terms by international sellers are: