CFR Incoterms: Meaning, responsibilities, and advantages

CFR Incoterms rule benefits buyers (importers) who prefer suppliers (exporters) to arrange and pay for sea transport to a designated port. Under CFR, suppliers cover the cost and freight to the named port, but the risk transfers to the buyer once the goods are on board the vessel.

Buyers enjoy simplified cost management, handling risks from the point of loading. Suppliers must ensure efficient transportation to meet delivery schedules. Both parties should agree on the destination port details for smooth coordination.

In this guide, you’ll learn:

• Meaning of CFR Incoterms 
• Buyer’s and supplier’s responsibilities
• An example of CFR Incoterms
• Advantages and disadvantages
• Answers to frequently asked questions about CFR

What are CFR Incoterms?

CFR Incoterms (Cost and Freight) rule is one of the 11 Incoterms defined by the International Chamber of Commerce (ICC). Under CFR, the supplier fulfills their responsibility by delivering the goods onboard the vessel and paying the transportation costs to the port of destination. The risk transfers to the buyer once the products are loaded onto the ship.

CFR Incoterms agreement is advantageous when the exporter agrees to arrange and cover the main carriage costs up to the destination port.

Key features of CFR Incoterms explained:

• Point of delivery: The delivery location is the port of destination.
• Modes of transport: Cost and Freight Incoterms rule applies exclusively to sea and inland waterway transport.

Insurance coverage: Negotiable. The supplier doesn’t need to provide insurance.

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💡 The International Chamber of Commerce updates the Incoterms rules every ten years. The current versions are Incoterms 2010 and Incoterms 2020. When you apply CFR or any other rule in a contract, indicate which edition you're using to prevent confusion or misinterpretation.

Read more: What are the types and rules of Incoterms?

Supplier’s and buyer’s responsibilities under CFR Incoterms

Uncover the obligations that each party has under CFR Incoterms.

Supplier’s responsibilities

• Export packaging: Ensuring the goods are properly packed for their international journey.
• Loading charges: Paying for the cost of loading the products onto the initial transport at the pickup location.
• Delivery to port/place: Transporting the goods to the carrier or specified party at the named port or location as per the contract.
• Export formalities: Managing all export-related paperwork, including duties, taxes, and customs clearance.
• Origin terminal charges: Covering any expenses incurred at the origin terminal, such as handling fees.
• Loading onto carriage: Overseeing the loading of the products onto the main shipment vehicle.
• Main freight charges: Covering the main transportation costs to move the goods to their destination.

Buyer’s responsibilities

• Destination port charges: Paying for the expenses at the destination port, including unloading and handling.
• Delivery to the final destination: Taking responsibility for the goods once they arrive at the specified port and arranging further transport to the final delivery point (buyer’s premises or designated place).
• Unloading at destination: Managing and covering the costs associated with unloading the goods.
• Import formalities: Handling all import-related procedures and expenses, including customs duties, taxes, and clearance in the destination country

An example of CFR Incoterms

Let's say Tech Innovations, an electronics retailer in the U.S., is importing smart devices from Shenzhen Electronics, a Chinese manufacturer, using CFR Incoterms.

Supplier's responsibilities (Shenzhen Electronics)

Under Cost and Freight Incoterms, Shenzhen Electronics packages the smart devices and arranges transportation to the port in Los Angeles. They handle export documentation and customs clearance in China and cover ocean freight to Los Angeles. 

The risk of loss or damage transfers to Tech Innovations once the goods are loaded onto the vessel in China.

Buyer's responsibilities (Tech Innovations)

Tech Innovations is responsible for securing insurance, managing import customs clearance, and covering duties and taxes upon the goods' arrival in Los Angeles. They also oversee inland transportation within the U.S. and conduct quality inspections once the smart devices reach their warehouse.

This CFR Incoterms example emphasizes the supplier's responsibility for the shipment to the destination port, while the buyer handles the import and subsequent logistics.

Advantages and disadvantages of CFR Incoterms 

CFR Incoterms rule comes with its own set of strengths and weaknesses. Assessing these can help you decide if it’s the best option for your situation.

Advantages

• Exporter’s expertise: The supplier, often being more familiar with the export process and regulations in their country, can efficiently manage the shipment and negotiate better shipping rates.
• Cost predictability: Since the supplier covers the cost of freight, the buyer has a clear understanding of the shipping expenses upfront, aiding in budgeting and financial planning.

Disadvantages

• Responsibility for freight costs: Suppliers bear the expenses of the freight to the named port of destination, which can fluctuate and impact profit margins if not accurately factored into pricing.
• Documentation and customs handling: The buyer must handle customs clearance and related import documentation at the destination. It can be complex and time-consuming, especially if the buyer is not familiar with the procedures.

💡 The pros and cons for each party under a CFR arrangement can differ based on the contract's terms and the specific characteristics of the transaction. Factors such as the nature of the goods, the distance, and the selected mode of transport can influence the overall advantages for both exporters and importers.

Learn more: What is export finance and how can it help SMEs?

CFR Incoterms: Frequently Asked Questions (FAQs)

What is the difference between CFR and CIF?

The main difference between CFR and CIF (Cost, Insurance, and Freight) is the insurance obligation. Under both rules, the seller is responsible for covering the cost and freight charges to the destination port, but only under CIF the supplier needs to provide insurance for the shipment.

Who pays freight on CFR?

Under CFR Incoterms, the seller is responsible for paying the freight charges to transport the goods to the destination port. The buyer is then responsible for any additional expenses, such as insurance, import customs clearance, and duties at the destination.

Is CFR only for sea freight?

CFR Incoterms rule is specifically designed for sea and inland waterway transport.

When to use CFR Incoterms

CFR Incoterms agreement suits businesses that prefer the seller to arrange and cover the cost of sea transport to a designated port. This term is beneficial for companies that want to manage the risk of the goods once they are on board the vessel while benefiting from having the shipment expenses covered to the port of destination.

The decision to use the Cost and Freight Incoterms rule depends on the specific needs of the business, risk tolerance, and international trade experience. It’s essential to weigh the advantages and disadvantages, consider the unique details of the transaction, and consult with experts if needed.

By understanding Incoterms and choosing the right one, you can navigate the complexities of international trade with confidence and achieve success globally.

Learn more about other Incoterms:

• EXW (Ex Works)
• FCA (Free Carrier)
• FAS (Free Alongside Ship)
• FOB (Free On Board)
• CIF (Cost, Insurance, and Freight)
• CPT (Carriage Paid To)
• CIP (Carriage and Insurance Paid To)
• DAP (Delivered at Place)
• DPU (Delivered at Place Unloaded)
• DDP (Delivered Duty Paid)

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