What are Incoterms? What types are there?
The world of business internationalisation and business quality is full of its own terminology. Acronyms, certifications, agreements… For those approaching for the first time, it can be overwhelming. But you need to know what you are talking about and understand the concepts. Among the issues that are very relevant in this field but also very unknown outside of it there are the Incoterms.
If you are reading this, it is probably because you have doubts about it. If you are wondering what Incoterms are and what types exist, you are in the right place. At Nextport, as experts in business internationalisation, we are going to explain it in a simple way.
Incoterms: what are they and what are they for?
What are Incoterms: definition and what aspects they regulate
They are internationally recognised guidelines, agreements or clauses that are used in international trade to regulate the usual or most repeated commercial uses.
In other words, they point out or set out a type of agreement between the buyer and the seller (importer and exporter). Their purpose is to avoid misunderstandings in case of error.
So, what are Incoterms? Agreements or clauses in an international sales contract that indicate who is responsible for certain aspects in each step of the transaction. And, therefore, who, in the case of an error, must assume the cost derived from that error.
Incoterms regulate four aspects or elements of the contract:
- Delivery of goods. How it is, who delivers and receives it.
- Transfer of risk. Who bears the risks and costs at each point of transfer over a period?
- Distribution of costs. Which are borne by the buyer and which by the seller.
- Customs formalities. The necessary documents are usually the responsibility of the seller. However, if otherwise agreed, there is a specific Incoterm that delegates responsibility to the buyer.
What are Incoterms in detail
- They are free acceptance agreements.
- They are a simple, official and clear way of defining and allocating responsibilities without risk of ambiguity or confusion.
- They are agreements or guidelines with an official classification and an accepted translation in each language.
What types of Incoterms are there?
They are classified into four groups: E, F, C and D.
In this group there is only one Incoterm.
- EXW (Ex works). Once the goods have left the manufacturer’s premises, all responsibility for the goods and all the necessary steps are the responsibility of the buyer.
- FCA (free carrier). The seller delivers the goods either to the carrier or to another person assigned by the buyer. This delivery takes place at the seller’s premises or at another agreed place of delivery. In order to avoid mistakes, it is advisable to state this place in writing.
- FAS (Free Alongside Ship). Only used in maritime transport. It indicates the goods being delivered by the seller alongside the ship designated by the buyer at the port from which the shipment is to be made. From the time of delivery, all costs incurred are borne by the buyer.
- FOB (Free On Board). Only used in maritime transport. The seller or a person designated by the seller must deliver the goods on board the vessel named by the buyer at the named port of departure.
- CPT (Carriage Paid To). It establishes that the seller delivers the goods to the carrier or to another person determined by the buyer and that this is done at a specific place agreed between both parties. The necessary expenses for this delivery are the obligation of the seller, who must hire and pay them. But from the moment of delivery, the goods become the responsibility of the buyer and as such he must take care of customs and import clearance.
- CIP (Carriage and Insurance Paid To). It indicates the same as the previous Intercom with one addition. This is that the seller must take out insurance against loss or damage to the goods during transport to the named place of destination.
- CIF (Cost, Insurance and Freight). Also, only for maritime transport.. Determines the delivery of the goods by the seller on board the ship or that he ensures that this occurs. Once the goods are loaded on the ship, the risk of loss or damage is transferred. The seller is responsible for the loading and its cost at that point, as well as the obligation to pay insurance for loss or damage to the goods during their transport to the port.
- CFR (Cost and Freight). It is like the previous one but does not require insurance.
- DAP (Delivered At Place). The seller must deliver the goods at the point of origin of the transport route that the buyer has agreed to. And he is responsible for them until they are delivered at the agreed place.
- DPU (Delivered At Place Unloaded), The seller must deliver the goods unloaded from the means of transport at the named place of destination. He is responsible for the goods until they are delivered and unloaded at the named destination.
- DDP (Delivered Duty Paid). The seller is responsible and liable for payment from the transport to the place of destination. This includes bearing the costs of customs and internal transport once the goods have arrived in the country of destination.
In short, what are Incoterms?
Now you know the types of Incoterms and what they establish. It will therefore surely be easier for you to understand what they are and their importance.
It is thus clear that these are officially accepted international clauses that designate the responsibilities of seller and buyer at different steps, facilitating common understanding. And reducing the risk of problems, costs or loss of trust due to unclear points.
Choosing the right one, however, is more complex. Not always exempting oneself from responsibility is the most appropriate option, even if it seems so. But that is a question for another article.