What are Incoterms?
Incoterms are terms like: FOB, CIF, DDP - and you will find them specified on purchase orders for the manufacture and import of goods.
Incoterms are established by the ICC, and were last revised in 2020, so you should always see the reference being to "Incoterms 2020". This is important. See here for more information from the ICC on Incoterms - the basics.
In trade finance, incoterms are important because they define:
Who is responsible for what, including licenses, custom duties, insurance and cost
When ownership of the goods moves from the exporter to the importer
Where the goods are handed over
What are the eleven Incoterms 2010?
There are eleven incoterms.
The following are used with all modes of transport:
EXW, ex-works (handover at the factory)
FCA, free carrier (handover to the logistics provider)
CIP, carriage and insurance paid (handover to the logistics provider and pay costs)
CPT, carriage paid to (handover at a nominated destination)
DDP, delivered, duty paid (handover to the buyer in the buyer country after import customs)
DAT, delivered at terminal (handover for unloading before import customs)
DAP, delivered at place (handover at a nominated destination before import customs)
And these four are used only with ocean transport (by ship):
FAS, free alongside ship (deliver to the export quayside)
FOB, free on board (deliver to the ship at the export quayside)
CFR, cost and freight (basically the same as CPT)
CIF, cost, insurance and freight (basically the same as CIP)
What do the Incoterms mean in practice?
The Incoterms tell us:
Who is organising carriage and insurance?
Who is paying some or all of the costs of getting the goods to the buyer?
Who needs permissions and licenses (to get through customs, for example)?
When ownership of the goods moves from the seller to the buyer?
We can summarise the terms as follows:
EXW, FCA, FAS, FOB: buyer is taking responsibility for the freight costs and insurance after the goods are handed over to a specific destination, which is in the Seller country. So these are the easiest for the Seller because the buyer is clearing customs and managing the transport process.
CFR, CPT, CIF, CIP, DAP, DAT: seller is taking responsibility for managing transport, paying for freight costs and sometimes also insurance, and also clearing the goods through his export customs but not the import customs. The different terms refer to where the goods are handed over.
DDP: this is toughest on the seller, who is taking responsibility also for importing the goods and delivering the goods to the buyer's premises in the import country.
How do Incoterms affect payments?
The seller wants to be paid as early as possible, whilst the buyer would like to pay as late as possible. This is fine.
The purpose of trade finance is to bridge this gap. As a general principle, transactions that use Incoterms where the seller responsibility is low are the easiest to finance. These are Incoterms that do not have a "D" in them.
How do Incoterms work with platforms?
Platforms, like ours (www.prima.trade) work with all kinds of Incoterms, enabling payments to suppliers to be accelerated. Whether goods are landed or FOB, suppliers want to be paid quickly and buyers want to pay later.
Platforms sit in between supplier and buyer bridging that payment gap at a low cost - much lower than letter of credit or arranging credit with local banks.
Good platforms have:
integrated transport documents
automated 3-way match at shipment
automated invoice approval at shipment
call down funds from the buyer or a funder as invoices get approved
handle the payments to suppliers so all suppliers can be eligible
These are all capabilities of our platform - see more here.