Incoterms explained: A guide for buyers and suppliers

Expanding your business internationally presents significant opportunities for growth, but navigating the complexities of global commerce requires a strategic approach. A key factor that can’t be overlooked by businesses venturing into international markets is the role of Incoterms.

Whether you're an experienced exporter/importer or new to the global marketplace, you must have a firm grasp of Incoterms for sustainable success.

What are Incoterms?

Incoterms (International Commercial Terms) rules are a globally recognized set of standardized trade terms published by the International Chamber of Commerce (ICC). These terms clarify the responsibilities and liabilities of buyers (importers) and suppliers (exporters) in international trade transactions. They also outline aspects such as delivery points, costs, and risk transfer.

Incoterms answer questions like:

• Who pays for the shipping?
• Who handles export/import customs clearance?
• Where exactly does the supplier deliver the goods?
• Who handles insurance?
• When does the risk of loss or damage pass from the supplier to the buyer?

Businesses widely recognize and use Incoterms in B2B sales contracts because they bring clarity and minimize misunderstandings. Although voluntary, companies consider them an industry standard and frequently incorporate them into contracts to ensure smooth transactions.

The ICC revises and updates Incoterms periodically. The current version, Incoterms 2020, took effect on January 1, 2020.

List of Incoterms explained

Incoterms are categorized into two main groups to facilitate understanding and application in international trade: 

• 7 rules for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP).
• 4 rules for sea and inland waterway transport (FAS, FOB, CFR, CIF).

We'll follow this categorization to explain each Incoterm in detail, starting with the rules applicable to any mode of transport.

1. EXW (Ex Works)

Under EXW, suppliers have minimum obligations. The exporter’s only responsibility is to make the goods available at their premises or another designated location. The buyer assumes all costs and risks associated with collecting the cargo from that point onward, including transportation, insurance, and export/import clearance.

💡 Pro tip: Buyers should be aware that, under EXW, they’re responsible for all aspects of transportation and logistics once the goods leave the supplier’s premises. Partnering with a trusted freight forwarder at the origin port can help ensure smooth operations and protect the importer’s interests.

Read more: EXW Incoterms explained.

2. FCA (Free Carrier)

Under FCA, the supplier clears the goods for export and delivers them to a carrier or designated location specified by the buyer. The risk of loss or damage transfers to the importer once the cargo is in the carrier's possession.

💡 Pro tip: The designated point of delivery under FCA is critical, as this marks the transfer of risk from supplier to buyer. Since this place is typically at the origin and outside the buyer's direct control, the buyer should be cautious and consider the reliability of the carrier and the accessibility of the delivery point when agreeing to FCA Incoterms.

Read more: FCA Incoterms explained.

3. CPT (Carriage Paid To)

CPT means the supplier delivers the goods to a carrier (chosen by the exporter) at an agreed-upon place and covers the transportation costs to the named destination. The risk of loss or damage transfers to the buyer when the products are handed to the first carrier.

💡 Pro tip: Since the supplier handles transport but the buyer assumes risk early on, clear communication and a thorough understanding of this handover point are essential to avoid misunderstandings and potential disputes. Importers should also secure cargo insurance to cover potential losses during transit, as this responsibility falls solely on them

Read more: CPT Incoterms explained.

4. CIP (Carriage and Insurance Paid To)

CIP is similar to CPT, but in addition to the supplier’s responsibility for carriage to the named destination, they’re also required to procure and pay for cargo insurance up to that point. It's important to note that the risk of loss or damage shifts to the buyer as soon as the goods are handed over to the first carrier.

💡 Pro tip: While CIP requires the supplier to arrange cargo insurance at the higher level of Institute Cargo Clauses (A) (as Incoterms 2020 increased the insurance requirement), buyers should still carefully review the policy details to ensure they align with their specific needs and risk tolerance.

Read more: CIP Incoterms explained.

5. DAP (Delivered at Place)

Under DAP, the supplier is responsible for delivering the goods, ready for unloading, to a named place of destination. This means they handle transportation costs and assume risk until the cargo is made available to the buyer at that point. However, the importer is responsible for unloading.

💡 Pro tip: DAP requires clear communication and agreement on the precise delivery point because it marks where the responsibility for costs and risks shifts from the supplier to the buyer. Exporters should factor in potential on-carriage issues, and importers need to be prepared to handle customs duties and any import-related requirements.

Read more: DAP Incoterms explained.

6. DPU (Delivered at Place and Unloaded)

DPU puts the responsibility on the supplier to transport the goods to the agreed-upon destination and unload them from the arriving mode of transport. The risk transfers to the buyer once the unloading is complete at that location. DPU is unique because it's the only Incoterm that explicitly requires the exporter to handle unloading.

💡 Pro tip: Suppliers must make sure they have the resources or arrangements in place to manage the unloading process at the destination. It's also wise to consider potential logistical challenges and have contingency plans.

Read more: DPU Incoterms explained.

7. DDP (Delivered Duty Paid)

DDP places the maximum responsibility on the supplier. They handle everything from export to import clearance, including all costs and risks associated with delivering the goods to the buyer's specified location. This includes import duties, taxes, and customs formalities. The risk transfers to the importer only when the products are ready for unloading at the named destination.

💡 Pro tip: DDP involves substantial responsibility and potential costs for the supplier. Before agreeing to DDP, they need to research the import regulations, duties, and potential logistical challenges in the destination country. Having a reliable local agent at the destination can be invaluable.

Read more: DDP Incoterms explained.

From here on, these are the four Incoterms rules for sea and inland waterway transport.

8. FAS (Free Alongside Ship)

Under FAS, the supplier is responsible for delivering the goods alongside the ship designated by the buyer at the named port of shipment. The importer assumes all costs and risks, including loading the cargo onto the vessel, once the exporter has fulfilled their obligation. FAS is typically used for non-containerized cargo.

💡 Pro tip: Buyers should be prepared to manage all logistics and costs from the "alongside" point onward, including loading, transport, and insurance. Engaging a knowledgeable agent at the port can be beneficial, especially if the buyer is unfamiliar with the specific handling procedures.

Read more: FAS Incoterms explained.

9. FOB (Free on Board)

Under FOB, the supplier is responsible for delivering the goods on board the ship specified by the buyer at the named port of shipment. The risk transfers to the importer once the products are loaded, and they handle all costs from that point forward. FOB is generally more suitable for non-containerized shipments.

💡 Pro tip: Clear communication with the buyer about loading procedures and documentation is essential. The supplier should be aware of potential extensions to FOB, such as "stowed" or "stowed and trimmed," and fully understand their obligations if these terms are used.

Read more: FOB Incoterms explained.

10. CFR (Cost and Freight)

CFR means the supplier is responsible for delivering the goods, cleared for export, and loaded onto the ship at the port of shipment. The exporter also pays the costs, including freight, to transport the products to the named port of destination. Import clearance and any associated costs at the destination port are the buyer's responsibility.

💡 Pro tip: Buyers should secure insurance coverage that begins at the port of shipment, as they assume all risks to the goods from that point forward, even though the supplier has arranged and paid for the freight.

Read more: CFR Incoterms explained.

11. CIF (Cost Insurance and Freight)

CIF is similar to CFR, with the supplier responsible for transportation costs, including freight, to deliver the goods to the named port of destination. The key difference is that CIF requires the exporter to obtain and pay for marine insurance covering the cargo during carriage to the destination port.

💡 Pro tip: Buyers must verify the adequacy of the insurance coverage provided by the supplier, especially if they have specific requirements or if the goods are of high value.

Read more: CIF Incoterms explained.

List of Incoterms frequently asked questions (FAQ)

What is the purpose of Incoterms?

Incoterms rules define the responsibilities of buyers and suppliers in international trade transactions, clarifying who is responsible for costs, risks, and obligations at each stage of the shipment process.

Are Incoterms mandatory?

Incoterms rules aren’t mandatory. They aren't laws enacted by governments; they are guidelines widely used and highly recommended for clarity and risk management in international trade. By using Incoterms, buyers and suppliers can establish a common understanding of their respective roles and responsibilities.

What does Incoterms mean?

"Incoterms" is an abbreviation for "International Commercial Terms." These terms provide a globally recognized set of rules for the interpretation of commonly used trade terms in international contracts for the sale of goods.

Do Incoterms apply to domestic shipments?

While Incoterms are primarily designed for international trade, they can be used in domestic sales contracts if both the buyer and supplier agree. However, they should carefully consider whether using Incoterms is necessary and beneficial for domestic transactions, as some aspects may not be relevant or may require adaptation.

Is Incoterms 2010 still valid?

While Incoterms 2010 set of rules is no longer the latest version, it can still be used if both parties agree. However, we recommended using Incoterms 2020 for updated rules and clarity. The 2020 version includes revisions and clarifications based on current industry practices and legal developments.

How often are Incoterms updated?

The ICC typically updates Incoterms every 10 years to reflect changes in international trade practices. The latest version, Incoterms 2020, was published on January 1, 2020.

What Incoterms do not cover?

While Incoterms provide a comprehensive framework for allocating responsibilities in international trade, it's important to note that they do not cover every aspect of a sales contract. Here are some key areas not addressed by Incoterms:

• Ownership transfer: They don't determine the transfer of ownership of the goods. This should be addressed separately in the sales contract.
• Payment terms: They don’t define payment methods or terms.
• Product liability: They don’t address issues related to product quality or liability.
• Breach of contract: They aren't a substitute for a well-drafted contract outlining remedies for breach of contract.

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

Understanding and applying Incoterms 

Incoterms provide a common language that cuts through confusion, reduces misunderstandings, and mitigates risks, ensuring that your transactions proceed smoothly and successfully.

The right Incoterms rule is like the right tool for the job. It depends on your goods, your shipping method, how much control you want, and the costs and risks you're comfortable with.

By carefully choosing the Incoterms, you're setting your business up for success, ensuring that all parties involved are on the same page, and paving the way for more efficient and more profitable transactions.

At Stenn, we understand the importance of streamlining international trade processes. As the largest and fastest-growing online platform for financing small and medium-sized businesses operating in global trade, we are committed to providing businesses with the resources and support they need to thrive.

If you're looking to optimize your working capital, improve your trading terms, and accelerate your business growth, consider exploring Stenn's invoice financing and factoring services.