Common Incoterms Mistakes in International Shipping: What You Need to Know

Introduction

In the world of international trade, Incoterms play a crucial role in defining the responsibilities of buyers and sellers during shipping transactions. Established by the International Chamber of Commerce (ICC), these terms set clear guidelines for both parties to follow throughout the shipping process. However, despite their importance, many businesses still make critical mistakes when using Incoterms. In this article, we'll explore the six most common Incoterms errors and how to avoid them, ensuring smoother logistics operations for your business.

At FreightAmigo, we understand the complexities of international shipping and the importance of using Incoterms correctly. As a full-service digital supply chain finance platform, we're committed to helping businesses navigate the intricacies of global trade. Let's dive into these common mistakes and learn how to steer clear of them.

1. Using FOB for Containerized Cargo

One of the most widespread misconceptions in international shipping is the use of Free On Board (FOB) for containerized cargo. Many importers and exporters believe this is the standard practice, but it's actually a significant error.

The problem arises at the port of origin. Under FOB terms, risk transfers when the cargo is loaded onto the vessel. However, in practice, shippers often hand over the cargo to the carrier at the terminal, where it waits to be loaded. During this waiting period, any damage to the cargo is technically still the shipper's responsibility.

This misunderstanding can lead to disputes and potentially sour business relationships. To avoid such issues, it's crucial to use the correct Incoterms for containerized freight:

• Free Carrier (FCA)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid To (CIP)

These terms are specifically designed for containerized cargo, with risk transferring at origin when the cargo is handed over to the carrier at the agreed-upon location.

At FreightAmigo, we can help you choose the right Incoterm for your shipment, ensuring that your containerized cargo is handled correctly from the start.

2. Failing to Specify the Exact Location

Many businesses are unaware that Incoterms allow for the specification of exact locations. Failing to provide a full address can lead to disputes and inconveniences for the buyer.

For example, stating "FCA Miami" is too vague and could refer to numerous possible delivery locations across a large area. This ambiguity allows the seller to choose any delivery point within the general location, which may not align with the buyer's intentions.

To avoid such uncertainties, always list an exact location, including:

• Specific port name (e.g., Miami port)
• Container Freight Station (CFS) for Less than Container Load (LCL) shipments
• Postal code

By being precise about the location, you can prevent misunderstandings and ensure smooth logistics operations. FreightAmigo's platform allows you to easily specify and communicate exact locations for your shipments, reducing the risk of confusion or disputes.

3. Sellers Committing to DDP or DAP Without Proper Preparation

Delivered Duty Paid (DDP) and Delivered at Place (DAP) are Incoterms that place significant responsibilities on the seller. Under these terms, the seller is responsible for paying all arrival expenditures at the destination.

DDP, in particular, requires the seller to:

• Pay local taxes and duties (e.g., GST, VAT)
• Handle customs clearance at the destination
• Register as an overseas importer in the destination country

Many sellers commit to these terms without fully understanding the implications or checking if they can handle these responsibilities in the buyer's country. This can lead to complications and delays in the shipping process.

As a buyer, it's essential to ensure that your suppliers are registered as foreign importers in your country and can fulfill their tax and duty responsibilities. Even if it's not technically your responsibility under these Incoterms, being proactive can help prevent delays in cargo delivery.

FreightAmigo's digital platform provides comprehensive information and support for both buyers and sellers, helping them understand and fulfill their responsibilities under various Incoterms, including DDP and DAP.

4. Buyers Using EXW Without Considering Export Procedures

Ex Works (EXW) is an Incoterm that places minimal responsibilities on the seller. Under EXW, the seller's obligations end with the proper packaging of the merchandise. From that point on, the buyer takes over all responsibilities, including:

• Export procedures from the origin country
• Communication with export authorities
• Loading the cargo onto the truck during pickup

Many buyers choose EXW without fully considering the implications of handling export procedures in the seller's country. This can be particularly challenging if the buyer is unfamiliar with the export process of the origin country.

For example, under EXW, the shipper is not required to load the cargo onto the truck during pickup. The buyer often has to hire someone at the origin to do the loading. However, shippers may not always permit non-authorized personnel to carry out loading on their premises due to liability concerns. This can lead to complications and potential disputes over responsibility if the cargo is damaged during loading.

To avoid these issues, buyers should carefully consider whether they can realistically handle all the responsibilities under EXW. If not, alternative Incoterms like Free Carrier (FCA) may be more appropriate.

At FreightAmigo, we can help you assess your capabilities and choose the most suitable Incoterm for your specific situation, ensuring a smooth and efficient shipping process.

5. Using CIP or CIF Without Checking Insurance Coverage

Carriage and Insurance Paid To (CIP) and Cost, Insurance, and Freight (CIF) are Incoterms that require the seller to provide insurance coverage for the merchandise. However, a common mistake is failing to check whether the insurance coverage is sufficient and matches the requirements of the commercial contract.

According to Incoterms rules, only minimum coverage (110% of the contract value) is required under CIP and CIF. However, this may be insufficient for certain types of merchandise or specific conditions outlined in the sales contract.

To avoid potential issues:

• Review the insurance coverage provided under CIP or CIF
• Compare it with the requirements in your commercial contract
• If necessary, arrange for additional coverage to meet your specific needs

FreightAmigo's platform includes features to help you easily review and compare insurance coverage options, ensuring that your shipments are adequately protected throughout the journey.

6. Not Aligning Incoterms with Bank's Security Requirements for Payment

When using international payment methods such as Letters of Credit (LC), it's crucial to align your chosen Incoterm with the bank's security requirements. Letters of Credit are often used when there's a lack of complete trust between buyer and seller, providing a secure payment method.

With a Letter of Credit, payment can only be made after specific documents are submitted to the bank, proving that the conditions of the transaction have been met. The choice of Incoterm can significantly impact this process.

C-Incoterms (CFR, CIF, CPT, CIP) are generally best suited for payments with Letters of Credit. Under these terms, the seller is in control of two critical documents required for payment:

• Bill of Lading
• Commercial Invoice

On the other hand, F-Incoterms (FCA, FAS, FOB) give the buyer responsibility for transportation, which can potentially interfere with the issuance of the Bill of Lading. This interference might prevent the seller from getting paid.

To avoid payment complications, carefully consider the alignment between your chosen Incoterm and the requirements of your payment method. FreightAmigo's expertise in digital supply chain finance can help you navigate these complexities, ensuring smooth transactions and timely payments.

Conclusion

Understanding and correctly using Incoterms is crucial for successful international shipping. By avoiding these common mistakes, you can:

• Reduce the risk of disputes
• Ensure smooth logistics operations
• Maintain strong business relationships with your partners
• Streamline your payment processes

At FreightAmigo, we're committed to helping businesses navigate the complexities of international trade. Our digital supply chain finance platform offers comprehensive solutions to address these common Incoterms mistakes and many other challenges in global logistics.

Whether you need assistance with choosing the right Incoterm, specifying exact locations, managing insurance coverage, or aligning your terms with payment requirements, FreightAmigo has the tools and expertise to support you. Our platform combines artificial intelligence, big data, and various technologies to accelerate logistics, information, and cash flow, ensuring a hassle-free and enjoyable logistics experience.

Don't let Incoterms mistakes hinder your international shipping operations. Partner with FreightAmigo today and experience the power of our digital logistics solutions. Together, we can transform the way you handle global trade, making it more efficient, secure, and profitable.