Incoterms (International Commercial Terms)

The import and exports between countries carried out every day by companies call for a universal terminology for better understanding. Hence the importance of knowing the international commercial terms known as Incoterms.

These terms are expressed as three-letter acronyms, in the form of a code, which explain each regulation within contracts agreed by companies in their buying and selling activities.

The acronyms are widely observed by various countries and companies. They are the easiest, fastest and safest way to instantly interpret different commercial terms.

What are Incoterms used for?

Part of their function is to identify terms that regulate each contract. As a result, it is possible to identify the exact date and time when a risk transfer occurs in a transaction, who is responsible for the transport and who will be responsible for the payment, where it will be delivered, who the contractor is, and which documents are required to release the goods.

Each term used is very specific, so you should know its full meaning. You should also remember that some of them are updated every year, leading to changes in regulations or trade names.

Important features of Incoterms

  • The terms are not fixed, as some of them are periodically revised by the International Chamber of Commerce. Only a small part is modified, but you should always be aware of the change.
  • Each term is composed of three letters and classified according to the initial letter, which can be either E, F, C or D.
  • Depending on the group, it will refer to a certain type of transport and the form of delivery.

Eleven Incoterms used in international commerce

Depending on the type of trade carried out, these terms can be divided into two groups. One of them will refer to any mode of transport, while the other (smaller) group will refer to sea and inland waterway transport. This makes it easier to identify and apply them.

EXW Incoterm (Ex Works)

This term calls for particular caution, as it indicates that the seller’s responsibility ends when the goods are delivered to the importer. It should be used between countries where customs procedures are scarce or when they are countries of the same group as in the European Union.

The goods are delivered by the seller at their own factory or warehouse. This Incoterm is where the seller assumes fewer obligations and if there are complications at customs, the import of said goods might not be justified.

These would be unnecessary complications that impede the import process.

FCA Incoterm (Free Carrier)

Depending on the place or mode of delivery of the goods, the acronym FCA is used, which may be at the terminal or the factory. This Incoterm enables free carriage.

Those who prefer to use FCA Factory will receive all the goods from the seller, delivered either on a trailer or in a container, from their own factory or warehouses, and even anywhere that the seller chooses. When the delivery is made, their responsibility for the goods will end there. Meanwhile, FCA Terminal means that part of the cargo is delivered, but in both cases the seller must be responsible for unloading the goods from the mode of transport used.

FAS Incoterm (Free Alongside Ship)

This term supports the seller, who delivers their goods to the departure port of the country of origin of the products. It is a way of transferring the risk of loss or damage before reaching the country to which the goods are being exported. The phase of transfer, loading and unloading of goods is the buyer’s responsibility.

FOB Incoterm (Free on Board)

Although this Incoterm gives the seller the responsibility to carry out all the corresponding customs procedures, their responsibility for the goods continues until the declaration on board the ship. Responsibility is transferred directly to the buyer, who is represented by the carrier.

CFR Incoterm (Cost and Freight)

This particular Incoterm is used when the goods are transported by sea. The only difference from the previous Incoterm is that the buyer is responsible for bearing all costs generated by transport after the goods have arrived at the destination port.

The seller bears the cost of freight up to the destination port.

CIF Incoterm (Cost, Insurance & Freight)

Similarly, CIF is used exclusively for maritime transport. Its function is to oblige the seller to bear the insurance costs of the goods, but the beneficiary will always be the buyer. The figures to be covered by the insurance of the goods can be agreed with the buyer.

CPT Incoterm (Carriage Paid To)

The seller bears the costs generated by the carriage of the goods, including the costs of insurance. This responsibility is transferred to the buyer once the goods have been left at customs. From then on, the custody is transferred to the buyer.

It is possible to use this Incoterm for any mode of transport, not just for sea and inland waterway transport.

CIP Incoterm (Carriage and Insurance Paid To)

This Incoterm follows the same parameters as CPT, but in this case the seller covers the insurance. Insuring the goods is the seller’s responsibility, even though they are for the benefit of a third party, with the idea of covering risks to the goods during the transfer. If the buyer requires more risk coverage, it must be agreed with the seller. This happens because it is the buyer who bears the risk, so it is ultimately improvable.

DAT Incoterm (Delivered At Terminal)

This is arguably the most complete Incoterm and favours the buyer. It is the seller who will bear all the costs. They are still responsible for the goods from the moment they are dispatched, loaded, transported and placed at the destination terminal. All these phases are the seller’s responsibility. This Incoterm replaces DEQ (Delivered Ex Quay).

DAP Incoterm (Delivery At Place)

If we compare DAP with DAT, we can see that the seller’s responsibility is extended by using this Incoterm (DAP). The difference is that the seller is responsible for delivering the goods directly to the place agreed with the buyer and not just limited to delivering at the terminal.