This excerpt is part of Entrepreneur.com's Second-Quarter Startup Kit which explores the fundamentals of starting up in a wide range of industries.
In Start Your Own Import/Export, the staff at Entrepreneur Press and writer Krista Turner explain how to start and run a successful import-export business. In this edited excerpt, the authors explain the meaning behind all the shipping acronyms you'll run across when running an exporting business.
As an exporter, you need to understand international shipping terms to quote your prices profitably. Here are the most common:
Ex Works (EXW). This is where the merchandise is picked up at your shop or warehouse, or your supplier's warehouse or factory. The unstated agreement here is that you'll have the product ready to go, properly packaged for shipping, stacked on a shipping pallet if necessary, and properly banded and labeled. You'll also have the merchandise ready at the time the customer has specified for pickup. In an EXW transaction, your responsibility for the merchandise ends when the customer or his representative picks up the goods. He's taken legal possession or title.
Free Carrier (FCA). This is the same as EXW, except it means you'll load whatever carrier the customer sends to pick up the goods. Because this is basically a courtesy, you should plan on charging the same price for FCA as you would for EXW. You won't see this term used for ground transportation--shipping by truck or rail--because it's basically the same thing as FOB, which is described later.
Free Alongside Ship (FAS). This means that as the exporter, instead of just having the goods ready for pickup, you'll deliver them to the ship or plane to be loaded. "Ship" can also mean a warehouse in the port area where the steamship line will later pick up the product and take it to the ship. You pay for transportation to the ship or ship's warehouse and have responsibility for the product until the shipping line representative signs for it and takes over the title.
Free on Board Vessel (FOB). This term means you not only have the merchandise delivered to the port, but you also see that it's loaded onboard the ship. Here you're taking on several additional charges, including the transportation fee to the port and the terminal receiving charges (TRC), or wharfage, which the shipping line charges to load your product onto the ship. There's also the freight forwarder's fee. In this instance, your responsibility doesn't end until the merchandise is safely loaded onto the ship and signed for by the captain or his representative.
Be sure you check with your freight forwarder before committing yourself to an FOB price quote. Steamship line prices can vary among ports. And trucking or common carrier prices will vary among cities and can even change with fluctuations in fuel prices. You'll also want to double-check the matter of legalization or consularization fees, because if they're necessary, you'll have to supply your importer with a certificate of origin, packing slip and invoice stamped by somebody in the importing country's local American embassy.
FOB prices are usually requested and quoted with the port of departure listed, as in FOB airport, Seattle, or FOB vessel, Panama City, Florida, or just FOB Panama City, Florida, without the words "vessel" or "airport."
Cost and Freight (CFR). This means you'll not only transport the packaged product to the port or airport and have it loaded onto the ship, but you'll also pay the shipping charges.
Cost, Insurance and Freight (CIF). This one means you're paying to ship the product to its international destination and you're also paying the insurance to cover its safe arrival. Marine insurance usually includes transportation to the port as well as on board the ship, so if something hideous happens anywhere en route, you're responsible, but you're also insured. CIF prices and quotes are written with the destination listed, as in CIF Rome.
Cost, Insurance and Freight Paid To (CIP). This one tacks on one more stipulation: You'll arrange and pay for having the product insured, trucked to the port or airport, shipped or flown to its international destination, then delivered directly to your customer's specified location by local ground transportation. Of all the shipping terms listed, this is the only one not applied to air freight as well as ocean. Why? Because CIF and CFR will cover your shipment. You also won't see this term used for ground transportation.
Delivered Duty Paid (DDP). DDP is like CIF, except that besides having the product insured, shipped and delivered to your customer's door, you also pay all customs duties.
Delivered at Frontier (DAF). This term applies to ground transportation only and means the merchandise gets dropped off at the border, or frontier. You pay the freight costs to the drop-off point and take responsibility for getting the shipment to that location.