What Is the Incoterm CFR (Cost and Freight)?

What Is CFR In Shipping?

CFR (Cost and Freight) is a shipping term used in foreign trade contracts. Under this incoterm, the seller bears the responsibility of paying for the main carriage to the destination port. They must provide the necessary documents to the buyer to allow them to acquire the goods from the carrier.

The CFR incoterm is one of the four incoterms defined by the International Chamber of Commerce (ICC) exclusive to transport via inland waterways and oceans. Under this rule, the seller does not cover any transport costs beyond arrival at the destination port.

Key Features of CFR

Here are the primary elements of the CFR incoterm:

Seller’s Obligations under CFR

Under CFR, the seller is responsible for preparing the goods for export, including proper packaging and marking. They must pay for the pre-carriage transport to the origin port and prepare a commercial invoice. 

The seller must also handle all export formalities, including customs duties, tax, documentation, and obtaining an export license. They are responsible for loading the goods onto the vessel, providing proof of delivery, and handling pre-shipment inspection charges. 

Additionally, under CFR, the seller also arranges and pays for the maritime transport to the destination port.

Buyer’s Responsibilities

The CFR incoterm requires the buyer to cover the cost of insurance during the main carriage, even though the seller pays for the transport. They must pay for the goods (as mentioned in the sales contract) and the pre-shipment inspection charges for import clearance.

Buyers must also undertake import customs duties, tax, and documentation. They assume all responsibility for the goods once they are loaded onto the vessel. The buyer handles all costs after arrival at the destination port, including discharge and onward carriage.

Designated Place for Delivery and Transfer of Risk

CFR dictates that the seller relinquishes the risk of loss or damage for the goods once they are loaded onto the vessel at the origin port. From that point, the buyer is liable for any damage to the cargo, even though the main carriage is paid for by the seller. This is why the buyer should obtain insurance, not the seller despite the seller paying for the transportation to the destination port.

Advantages of CFR

Here are the key advantages of using the CFR incoterm:

For the Seller

• Clear delineation of responsibility

• No liability for loss or damage once the goods are loaded

• Minimized complexity due to clearly outlined roles

• Possibility for higher profit margins due to control over main carriage costs

For the Buyer

• Improved cost transparency as the seller quotes the overall charges in advance

• Not having to arrange for the main carriage, simplifying logistics

• Reduced complexity, with clearly outlined roles and responsibilities

• Bearing no liability for loss or damage until the goods board the vessel

Disadvantages of CFR

Here are the challenges buyers and sellers can face under CFR:

Challenges for the Seller

• Limited control once the goods are on board

• Bearing all costs and risks until the goods are loaded onto the vessel

• Handling all export formalities, including documentation and taxes

• Greater transportation responsibility as they must arrange for the main carriage

Challenges for the Buyer

• Responsibility for import customs clearance and related costs

• Bearing all risks associated with the goods while in transit

• Limited control over logistics as the seller chooses the carrier

• Not being able to negotiate the most cost-effective option

When to Use CFR

CFR is used when the primary mode is maritime transport. It is preferred by buyers who do not have a strong logistics infrastructure or the resources to manage international shipping processes. Sellers who wish to manage freight and shipping arrangements themselves may also find this term beneficial.

FAQ

What’s the difference between CIF and CFR?

Cost, Insurance, and Freight (CIF) and CFR incoterms are both used for maritime transport. The primary difference is that in CIF, the seller has to cover insurance, while in CFR, it is the buyer’s responsibility.

What is FOB vs CIF vs CFR?

FOB (Free on Board), CIF, and CFR incoterms are all used for transporting goods via inland waterways and oceans. Here are the differences between them:

• In FOB and CFR, the buyer is responsible for insuring the goods while it is the seller’s responsibility in CIF.

• In CIF and CFR, the seller arranges and pays for the main carriage, while in FOB, it is the buyer’s responsibility from the moment the goods are loaded onto the ship.  

Who pays for CFR shipping?

In CFR, the seller arranges and pays for the shipment of cargo to the destination port, as well as any pre-carriage charges.

Is FOB or CIF better?

The choice between FOB or CIF depends on the precise requirements of buyers and sellers. If the buyer is familiar with transport logistics and prefers to choose their own carrier, they should opt for FOB.

If they are new to international shipping and do not know how to navigate the landscape, CIF gives the primary responsibility to the seller.