Although the greater majority of people does not know it, freight plays an integral role in our everyday life. Furthermore, knowing who are your incoterms for 2021 is crucial when you are shipping goods. The reason being that you will have a greater understanding of the parts of the supply chain and their duties. Below, we will provide you with easily digestible information about incoterms, giving an explanation for each one of them.
What are incoterms and what are their types?
The abbreviation Incoterms stands for International Commercial Terms. They define responsibility and liability for the shipment of goods and represent standard contract terms utilized in sales contracts with importing/exporting. Basically, it defines how far down the line will the supplier guarantee that the goods are relocated and when does the buyer assume the shipment process. Knowing this information is useful, especially when you need to export your product from Kuwait.
The most common types of incoterms are FOB (Free On Board), EXW (Ex Works), and FCA (Free Carrier). However, there is a lot of information to acquire about these and other options. Additionally, it is good to know that these are legal terms that are written from a legal point of view. This can make them confusing and difficult to understand. It could lead you to make the wrong and transforming your shipment into a costly disaster. Worth knowing is that the majority of incoterms refer to both air and sea freight. However, FOB, FAS, CFR, and CIF are exceptions and apply to sea freight only.
Why are Incoterms for 2021 important and what are the differences between countries?
Even before negotiating the sales contract, make sure to consider incoterms. If you do not, you risk having needless complications to the shipment or being ripped off by the supplier on the deal. In some countries, customs procedures are much more relaxed, the EU being an example thanks to its borders. However, you need to pay additional agreements and charges in other countries. The US requires a Customs Bond, which applies to both imports and exports. In the UK, a Deferment Account is required when importing. Finally, India includes a withholding tax when exporting.
Rules applying to incoterms for 2021
Incoterms rules have been updated in 2020 and there are eleven rules in total, which are split into two classes. The first being the terms of any mode of transportation, and the second one, the terms for sea and inland waterway transportation.
To help you understand this a bit better, here is a closer look at these terms:
- E terms (EXW): The vendor makes available its goods at their premises in order for the customer to collect. This is the minimum obligation for the vendor. EXW is short for Ex Works.
- F terms (FCA, FOB, FAS): The vendor delivers the goods to a carrier appointed by the customer. The seller will arrange and pay for the delivery of goods to the carrier, but the buyer pays for everything after that. FCA is short for Free Carrier.
- D terms (DPU, DAP, DDP) The vendor bears all risks involved in bringing the goods to the customer. DAT (Delivery at Terminal) is changed to DPU (Delivery at Place Unloaded). DAP is short for Delivery at Place and DDP is short for Delivery Duty Paid.
- C terms (CFR, CIF, CPT, CIP): The vendor has to contract for carriage, but does not assume the risk of loss or damage after the shipment. CFR is short for Cost and Freight, CIF is short for Cost Insurance and Freight, and CPT is short for Carriage Paid To.
When to question advice, what incoterms don’t cover, and defining the place name
There are freight forwarders that prefer using only a small selection of incoterms. It should come as no surprise if some freight forwarders insist on using their incoterms and reject the ones you’ve suggested. Also worth knowing is that incoterms do not cover possible force majeure situations, property rights, and breach of contract. Therefore, you should make sure that your sales contract includes them. On a similar note, incoterms do not assign responsibility for arranging insurance, with the exception of C terms. This makes freight insurance a separate cost for customers. This really beneficial when you are shipping to Bahrain.
Make sure that the named place follows the three-letter incoterm abbreviation in your sales contract. It is crucial for the location to be precise, particularly in the case of large cities that have multiple terminals. Also worth mentioning is that larger terminals include several drop-off points.
How incoterms impact your shipping cost
Different incoterms can impact your freight cost. If your shipping with EXW, the responsibility for the added cost of transporting your goods from your supplier to the seaport or airport would fall on you. When you are cargo shipping to Saudi Arabia make sure to take this into account.
Letters of credit pr documentary credit can limit the choice of incoterm. That is so due to the fact that they are used where the trust is limited between the seller and the customer. In order for the chain to release funds, you would need to provide several documents to the bank. EXW is exempt from this since you pay the supplier prior to the pickup.
F terms require trust because of situations when the customer cancels the international transit. In that case, the supplier would be left without a bill of lading to present to the bank. In the case of D terms, they require trust because the seller is bearing all of the transportation expenses. That leaves the four C terms as the best options to use with a letter of credit.
Making the final call
As you can see, there are a lot of factors to consider when choosing incoterms for 2021 that would suit your shipping needs. Make sure to go through all of the terms and select one that is the best for you. Alternatively, you could hire a moving company like EasyMove Kuwait to guide you through this process instead. They would give you professional advice, which will save both time and money in the end.