Moving goods between countries requires clear rules on who handles the costs, risks, and responsibilities involved. International Commercial Terms, or Incoterms, provide a shared framework that helps buyers and sellers stay aligned throughout the shipping process.
CFR Incoterms (Cost and Freight) are commonly used in sea transport. They define how responsibilities are shared, especially regarding freight charges and the point at which risk transfers. Understanding how CFR works helps businesses avoid mistakes, improve shipping processes, and make better decisions in global trade.
What are CFR Incoterms in Shipping?
CFR Incoterms, which stands for “Cost and Freight,” is a set of internationally recognized shipping terms used in sea transportation. Created by the International Chamber of Commerce (ICC), CFR is part of the broader Incoterms framework that standardizes shipping agreements between international trading partners.
Under CFR (Cost and Freight), the seller pays to transport the goods to the destination port, but the buyer takes on the risk once the cargo is loaded at the origin. This cost–risk split is what sets CFR apart from other Incoterms.
#Here’s how responsibilities break down under CFR:
- The seller delivers the goods on board the vessel.
- The seller pays for the cost of bringing the goods to the named port of destination.
- The risk transfers to the buyer once the goods are loaded on the vessel at the port of shipment.
- The buyer handles import formalities and further transportation from the destination port.
It is important to note that CFR Incoterms applies only to sea and inland waterway transport and cannot be used for other transportation methods such as air, rail, or road shipping.
Key Aspects of CFR Incoterms
Seller's Responsibilities
Under CFR Incoterms, the seller has significant responsibilities throughout the initial stages of the shipping process:
Goods Preparation: The seller must prepare the goods, package them properly for export, and provide any required inspection certificates.
Export Clearance: The seller must handle all export formalities, including obtaining licenses, permits, and completing customs declarations.
Transportation to Port of Origin: The seller must arrange and pay for the delivery of goods to the port of shipment.
Loading Costs: The seller bears the expenses of loading the goods onto the vessel at the port of origin.
Main Carriage Contract and Payment: The seller must contract and pay for the main carriage to the named destination port, including all freight costs.
Proof of Delivery: The seller must provide the buyer with documentation proving that the goods have been delivered on board the vessel, typically a bill of lading.
Risk Responsibility Until Loading: The seller bears all risks of loss or damage to the goods until they have been loaded onto the vessel at the port of shipment.
Buyer's Responsibilities
Once the goods are loaded onto the vessel at the port of origin, the buyer's responsibilities begin:
Risk Assumption: The buyer assumes all risks of loss or damage to the goods from the moment they are loaded onto the shipping vessel at the port of origin.
Insurance Arrangement: Unlike CIF (Cost, Insurance, and Freight) terms, CFR does not require the seller to provide insurance. The buyer is responsible for arranging and paying for insurance coverage during transit.
Import Clearance: The buyer handles all import formalities, including obtaining necessary permits, paying import duties, taxes, and completing customs declarations.
Unloading Costs: The buyer typically bears the expenses of unloading the goods at the destination port, although contract specifics may vary.
Transportation from Destination Port: The buyer is responsible for arranging and paying for the transportation of goods from the destination port to their final delivery location.
Inspection and Verification: The buyer should inspect the goods upon arrival and report any discrepancies or damages, recognizing that risk transferred earlier in the process.
Who Controls the CFR
Control under CFR Incoterms shifts at different stages of the shipping process, creating a complex arrangement that requires careful management:
1. Seller's Control Period: The seller maintains control over the goods during production, preparation for shipment, inland transport to the port of origin, and loading onto the vessel. The seller also controls the selection of the carrier and negotiates the main carriage contract.
2. Buyer's Control Period: Once the goods are loaded onto the vessel, the buyer assumes risk responsibility, though not physical control. The buyer gains physical control only when the goods arrive at the destination port, at which point they take responsibility for unloading and further transportation.
3. Carrier's Control Period: During ocean transit, the carrier (shipping company) has physical control of the goods, though legal responsibility and risk have already transferred to the buyer.
This arrangement creates a notable gap between risk transfer and physical control transfer, which is why many international trade experts recommend that buyers carefully consider their insurance options when operating under CFR Incoterms.
#For documentation control, the responsibilities are clearly divided:
The seller controls the export documentation and provides the buyer with proof of delivery onto the vessel.
The seller may initially control transportation documents (like the bill of lading), but they are generally transferred to the buyer to enable them to claim the goods at the destination port.
Import documentation is the buyer's responsibility and under their control.
Advantages of CFR for Online Businesses
For online businesses expanding into international markets, CFR Incoterms offers several significant advantages:
1. Simplified Seller Responsibilities: The seller's obligations are clearly defined and limited to arranging transportation to the destination port, without dealing with the complexities of international insurance or import procedures in foreign countries.
2. Competitive Pricing Strategy: Online businesses can incorporate freight costs into their product pricing, creating an attractive "landed price" (excluding import duties and taxes) for international customers. This transparency can enhance customer experience and conversion rates.
3. Control Over Carrier Selection: The seller maintains control over choosing the shipping carrier and negotiating freight rates, allowing online businesses to leverage existing relationships with carriers or secure volume discounts.
4. Streamlined Operations: By handling the shipping arrangements to the destination port, online businesses can establish standardized processes, potentially reducing operational complexity compared to arrangements where buyers select carriers.
5. Market Expansion Opportunity: CFR terms can make products more accessible to international buyers who may lack experience or relationships with international carriers, thereby opening new markets.
6. Buyer-side support in complex regions: For buyers in regions with limited shipping options or experience, a seller handling the main carriage arrangements under CFR terms can represent a significant service advantage, potentially justifying premium pricing.
These advantages make CFR particularly attractive for established online businesses looking to expand internationally while maintaining control over the shipping process and customer experience up to the destination country's port.
Disadvantages of CFR for Online Businesses
Despite its benefits, CFR Incoterms also presents several challenges for online businesses:
1. Risk-Cost Misalignment: One of the most significant disadvantages is the misalignment between risk transfer and cost responsibility. The seller pays for freight to the destination port but stops bearing risk once goods are loaded onto the vessel at the origin.
2. Insurance Complications: Since the buyer bears the risk during transit but may have limited visibility into shipping conditions, insurance arrangements can become complex and potentially contentious if damage occurs. Unlike CIF Incoterms, which obligates the seller to provide minimum insurance, CFR burdens the buyer, often without visibility into carrier practices.
3. Limited Control Over Final Delivery: The seller loses control over the goods at the destination port, meaning customer experience during the final delivery stage is outside their influence, potentially affecting overall satisfaction.
4. Documentation Complexity: Managing international shipping documentation requires expertise, and any errors can lead to delays, additional costs, or customer dissatisfaction.
5. Variable Port Charges: Destination port charges can vary and may be higher than anticipated, creating potential disputes about which party should bear unexpected costs not explicitly covered in the CFR terms.
6. Market-Specific Knowledge Requirements: Sellers must understand the shipping processes, requirements, and potential challenges associated with each destination port, requiring significant research and expertise.
7. Exchange Rate Risks: For contracts with delayed payment terms, exchange rate fluctuations between the time of shipping and payment can affect profitability.
For online businesses, particularly smaller operations or those new to international shipping, these disadvantages may outweigh the benefits of CFR, making alternative Incoterms worth considering.
When Businesses Should Use CFR?
CFR Incoterms is particularly well-suited for specific business scenarios and conditions:
Experienced Exporters: Companies with established export operations and strong relationships with freight forwarders and carriers can efficiently manage the shipping arrangements required under CFR.
Bulk or Container Shipments: CFR works best for bulk sea freight, especially when sellers can leverage volume-based freight rates.
When Leveraging Volume Discounts: Businesses that can secure favorable freight rates due to high shipping volumes may prefer CFR to pass these savings along to customers while retaining control over carrier selection.
Markets with Reliable Port Operations: CFR is most effective when shipping to countries with well-established, efficient port facilities and predictable customs procedures.
When Buyers Lack International Shipping Expertise: CFR can be helpful when buyers lack freight-handling experience, but only if they’re prepared to manage import formalities and secure their own insurance.
For Competitive Differentiation: In markets where competitors offer only ex-works (EXW) or free alongside ship (FAS) terms, offering CFR can provide a competitive advantage by simplifying the buyer's shipping arrangements.
When Cargo Insurance is Readily Available: CFR works best when buyers can easily obtain comprehensive cargo insurance to cover the risk during transit, which varies by market.
Businesses should carefully evaluate these factors against their operational capabilities, target markets, and customer needs before selecting CFR as their preferred Incoterm for international transactions.
CFR is a flexible Incoterm that offers sellers control over freight but passes in-transit risk to buyers. Businesses considering it should weigh the benefit of carrier control against the potential headaches of insurance, documentation, and final delivery.
For online businesses expanding globally, understanding CFR Incoterms is essential for creating accurate pricing structures, managing logistics efficiently, and establishing clear expectations with international customers.
Frequently Asked Questions
1. What are Incoterms?
Incoterms are standard trade terms developed by the International Chamber of Commerce to define responsibilities between buyers and sellers in global trade. Updated periodically, the latest version is from 2020. These rules clarify who handles shipping, risk transfer, customs, and insurance, helping avoid confusion and disputes in international transactions.
2. Who pays freight in CFR Incoterms?
In CFR terms, the seller pays for transporting goods to the destination port, including loading and export formalities. However, the buyer pays for unloading, import duties, and final delivery. Insurance isn’t included, so buyers must handle that separately.
3. Are CFR and CIF applicable for all modes of transport?
No. CFR and CIF apply only to sea and inland waterway transport. For air, road, or rail, other Incoterms like CPT, CIP, DAP, or DDP should be used. Using CFR or CIF in multimodal shipments may create confusion and disputes.
4. Does CFR include customs clearance?
CFR covers export customs clearance, meaning the seller handles all formalities in the country of origin. The buyer is responsible for import customs clearance, including permits, duties, and local regulations at the destination.
5. Is CFR cheaper than CIF?
CFR is cheaper for the seller since it excludes insurance, but this shifts insurance costs and risks to the buyer. While it may lower quoted prices, buyers must weigh the potential risk exposure and their own insurance capabilities before choosing CFR.
