Full Form of CIF

The full form of CIF is Cost, Insurance, and Freight which is regarded as an expense that includes costs, insurance, and freight, which is required to be borne by the seller of the goods until these goods are loaded onboard the vessel, and the liability of the concerned goods passes on to the buyer from the seller the moment the freight loads.

CIF is the most common method used in import and export shipping. The short form is used to address cost, insurance, and freight. CIF can be defined as a mechanism under which the seller bears the costs, insurance, and freight of the ordered goods until the cargo arrives at its destination port, which is mutually decided in the agreement.

CFI is an expense incurred by the exporter against potential risks such as loss or damage to ordered goods while the same is in transit to the port mutually decided by the parties in the sales contract.

Cost, insurance, and freight obliged the seller to organize ordered goods to the destined port mutually agreed between him and the buyer. The destined port mutually agreed upon by both the seller and the buyer must be accessible and not landlocked. It is used only in the case of goods that are transported through waterways.

The seller of the goods in a CIF is responsible for managing formalities concerning the clearance of export customs at the start point, entering into CIF contracts with the buyer of the ordered goods, arrangement, and payment concerning the transportation of the ordered goods from the origin to the destined port, payment, and settlement of the costs about loading and unloading of the ordered goods from the vessel, obtaining and paying for the insurance of the ordered goods, special documentation, etc.

However, It puts an obligation on the seller instead of any restrictions. The obligations of the buyer of the ordered goods in CIF contracts are taking care of the import customs clearance as well as relevant formalities, and special documentation, being liable for the costs once the goods reach the mutually agreed port, etc.

The characteristics of CIF are provided as follows:

• In a CIF contract, the costs and risks of ordered goods at two different points transfer from the seller to the buyer.
• The liability of the costs and risks gets transferred to the buyer of the goods as soon as the cargo reaches the mutually agreed port mentioned in the contract.
• The seller must pay for the cost, freight, and insurance of the ordered goods to be loaded onboard the vessel. This means that even though the risk transfers from the seller to the buyer, the former is responsible for taking care of insurance and freight costs from the export port to the mutually decided destined port.

ABC Limited ordered a thousand washing machines from Whirlpool using cost, insurance, and freight to the XYZ port. Whirlpool delivered ABC’s order of thousand washing machines to the port and loaded it on board the vessel. As soon as the washing machines were loaded onboard the vessel, ABC Limited became responsible for all the costs of getting the order delivered to the XYZ port. But when the ordered goods were in transit, there was damage caused to a few numbers of washing machines due to inappropriate handling. ABC Limited placed the order using cost, insurance, and freight; therefore, it is not responsible for bearing the losses caused by such damage to ordered goods in transit. Whirlpool will be responsible for bearing all the losses caused by damage to washing machines during transit of the same to the XYZ port.

The advantages of the CIF are as follows:

• The seller or the exporter of the ordered goods gets the opportunity to make more profits as he makes arrangements for freight and insurance.
• The seller or the exporter of the ordered goods retains the right to control the cargo's disposal until and unless the payment is cleared.
• The seller or the exporter of the ordered goods will not get to bear the risks of loss or damage caused to the cargo when the same was in transit.
• The buyer or the importer of the cargo will be free from any stress concerning the loss or damage caused to the ordered goods, and they can relax until the same gets shipped to the destined port mutually decided in the CIF contract.

Some of the limitations of CIF are listed below:

• The most significant disadvantage of a CIF could be that the potential risks of loss or damage caused to the goods in transit are transferred to the importer or the buyer during the contract.
• In a CIF contract, the risk passes on to the buyer as soon as they make the payment and take the document. The exporter might sometimes use this loophole to their advantage and load defective or damaged goods.
• If the goods are lost due to mishaps while in transit, then the number of goods lost might go unascertained, and the buyer would ultimately bear the same impact.

FOB Destination stands for free on board, whereas CIF is a short form used for cost, insurance, and freight. Though both terms are used with respect to freight, there are many differences between them. Let us have a look at them:

• The main difference between cost, insurance, freight, and free onboard is that the former is preferred by the buyer or the importer of the goods, while the latter is preferred by the seller or the exporter of the goods.
• In a CIF contract, the seller pays the costs, insurance, and freight to transport the goods to their destination, whereas, in a FOB contract, the seller loads the cargo onboard the vessel chosen by the importer, and the costs and risks involved are divided as soon as the ship starts to sail.

This has been a guide to what is the Full Form of CIF. Here, we explain the concept with characteristics, example, advantages, and disadvantages, vs FOB. You may refer to the following articles to learn more about finance –

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