CFR, short for “Cost and Freight,” is one of international trade's most widely used Incoterms (International Commercial Terms).
But what does it mean and when should you use it?
In this article, we’ll explain how it works, the advantages and disadvantages to buyers and sellers, and when you should consider using this Incoterm for your shipments.
What does Cost and Freight mean?
The Cost and Freight (CFR) Incoterm is specifically designed for sea or inland waterway transport.
Under a CFR agreement, sellers must cover the costs of transporting goods to the designated destination port, including freight expenses and loading charges.
This Incoterm is particularly common for bulk cargo or non-containerized goods, where the seller has direct access to the vessel for loading. It is crucial to note that CFR does not apply to container shipments, as the risk transfer point in CFR makes it impractical for goods handled through container terminals.
Transfer of risk
Transfer of risk is an essential concept under a CFR agreement. As soon as the goods are loaded onto the ocean freight vessel at the port of origin, the responsibility for any potential loss or damage shifts from the seller to the buyer. If any accidents occur during transit, the buyer bears the financial responsibility unless they have secured insurance.
Freight costs and responsibilities
Under CFR, the seller must arrange and pay for the transportation to the agreed destination port. This includes all associated costs, including pre-shipment inspections, export packaging, and terminal charges.
Insurance
Sellers are not obligated to insure the goods during transit under CFR. This is one of the main distinctions between CFR and similar Incoterms, like CIF (Cost, Insurance, and Freight). Under CIF, the seller must provide insurance for the goods throughout the shipment. In contrast, CFR only requires the seller to arrange transportation, leaving the buyer to decide whether or not to purchase insurance.
Best practice suggests buyers consider securing insurance in case of loss or damage while the goods are en route. Without insurance, the buyer assumes the entire risk for any issues arising during the shipment once the goods leave the port of origin.
Export Formalities
The seller handles all necessary export formalities under CFR. This includes obtaining export licences or permits, completing customs procedures, and covering export taxes or duties. By taking care of these formalities, the seller ensures that the goods are cleared for export before loading onto the vessel, relieving the buyer of these obligations.
Advantages of CFR
CFR presents several benefits for both sellers and buyers, particularly in terms of responsibility and cost distribution.
For the seller
CFR lets the seller maintain control over the transportation process, which can be advantageous when dealing with large volumes of goods. The seller also benefits from adding shipping costs to the sales price and potentially increasing their profit margin as a result. Finally, the seller’s liability for any potential loss or damage ends once the goods are loaded onto the ship.
For the buyer,
CFR simplifies the shipping process, as they are not required to arrange the main carriage for the journey. Instead, the buyer only needs to manage import formalities upon the arrival. This can be particularly convenient when dealing with international shipments where the buyer may not have access to reliable shipping carriers.
Disadvantages of CFR
While CFR has its advantages, it also presents certain challenges, particularly for the buyer.
For the buyer
One of the primary drawbacks for buyers under CFR is the higher cost of goods. Since the seller can include transportation costs in the sales price, the buyer may pay more than they would if they handled the shipping arrangements themselves.
Furthermore, the buyer assumes the risk of loss or damage to the goods once they are loaded onto the ship.
For the seller
The main disadvantage for sellers is that they must pay for the freight and transportation costs upfront, often before they receive payment from the buyer. This can create a cash flow issue, especially for sellers who are working with international buyers.
Example of shipping under CFR
Let’s look at the CFR Incoterm in action.
An importer in the UK orders a large shipment of bathroom tiles wholesale from a seller in China. Under a CFR agreement, the manufacturer will arrange for the transportation of the sea from Shanghai to Felixstowe and cover everything up until the goods are onboard.
At that point, all risk and responsibility are transferred to the UK buyer. Our UK buyer doesn’t have to pay for sea freight, but they will have to handle customs clearance, unloading and transportation to their warehouse.
When to Use CFR
CFR is best suited for situations where sellers have direct access to the vessel for loading bulk cargo or non-containerized goods. It is particularly effective in industries like agriculture, mining, or raw materials, where large shipments are regularly transported by sea.
When Not to Use CFR
CFR is not recommended for containerised shipments, as the risk transfer point differs from where the costs are assumed. For containerised goods, Incoterms like CPT (Carriage Paid To) are more appropriate since they account for risk transfers at earlier stages, such as when the goods are delivered to the carrier.
Get a CFR quote from the Far East with Pro Carrier
CFR is a widely used Incoterm in international shipping, offering a balanced division of responsibilities between buyers and sellers. It provides sellers with control over the shipping process while transferring the risk to the buyer once the goods are loaded onto the vessel.
However, it’s essential to understand the nuances of CFR, including the buyer’s responsibility for insurance and customs clearance at the port of destination.
That’s where Pro Carrier can help. By working as your customs broker, we can ensure smooth and timely clearance as soon as your goods arrive. Our proactive approach (we complete paperwork two weeks in advance) and decades of experience significantly reduce the chance of delays.
Find out more about shopping CFR with Pro Carrier or using us as a customs broker by speaking to an expert today.