You just closed your first export deal. Then the pro forma invoice lands and you realize you do not know who pays freight, who buys insurance, or when risk transfers. If that sounds familiar, you are not alone.
Incoterms are standard trade rules from the International Chamber of Commerce. They define who handles shipping, insurance, customs, and the exact point when risk shifts from seller to buyer. The current version is Incoterms 2020.
Picking the right term saves money and prevents disputes. New founders use Incoterms to set clear duties upfront, build trust with partners, and avoid costly surprises at ports and borders. You will learn what each major term covers, when to use it, and how to pick one that fits your shipment.
Trade is getting more digital, which can make documents and tracking simpler if you plan for it. For context on tech trends shaping exports, see this overview of Digital platforms revolutionizing international trade. Up next, we will break down the common Incoterms in plain English and help you choose with confidence.
What Are Incoterms and Why Should New Business Owners Care?
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Incoterms set clear rules for global sales. They spell out who pays for shipping, who handles insurance, who clears customs, and when risk shifts. You get fewer disputes, faster deals, and cleaner contracts. The latest version, Incoterms 2020, fits modern transport, including air shipments and electronic documents.
Here is the simple truth. Incoterms cover cost, risk, and tasks in your sales contract. They do not decide when ownership transfers. That comes from your contract law and payment terms. Keep this split in mind and you will avoid many surprises.
For a quick primer, you can scan the U.S. Commercial Service’s guide, Know Your Incoterms. If you want a visual cheat sheet, this updated overview is also useful, Incoterms Guide with charts.
A short example helps. A U.S. seller ships skincare sets to Berlin. With CIF Hamburg, the seller pays ocean freight and insurance to Hamburg, but risk passes when goods load at the U.S. port. With DAP Berlin, the seller keeps risk and cost to the buyer’s door in Berlin. Same cargo, different control, cost, and risk.
Use Incoterms to match your goals:
- Want control over freight to protect delivery speed? Pick a term where you book the carrier.
- Want to cap your costs and risk early? Pick a term where the buyer takes over sooner.
- New to exports and need simplicity? Choose terms that reduce handoffs and gray areas.
The Four Main Groups of Incoterms
Choose a group based on how much control and cost you want to carry.
- E Group (EXW): Minimal seller duty. Buyer picks up at seller’s site, handles export, main carriage, and risk from pickup.
- F Group (FCA, FAS, FOB): Seller clears export and delivers to the buyer’s carrier or point. Buyer pays main transport and takes risk after handoff.
- C Group (CPT, CIP, CFR, CIF): Seller pays for main carriage, sometimes insurance. Risk transfers early, usually when goods are handed to the first carrier.
- D Group (DAP, DPU, DDP): Seller bears most costs and risks to the destination. With DDP, the seller even handles import duties and taxes.
As a startup owner, decide how much control, cost, and risk you want. Incoterms give you the dials to set each one with confidence.
Key Incoterms Rules Explained for Beginners
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Here is a practical walk-through of the 11 Incoterms 2020 rules. Each summary states where risk transfers, who books freight and insurance, and when to use them. Remember, some rules work for any transport, while others are only for sea and inland waterway shipping. For a visual refresher later, this quick primer on Incoterms 2020 explained can help.
EXW, FCA, and FAS: Seller Hands Off Early
EXW (Ex Works) — any transport
Risk transfers when the buyer picks up at the seller’s site.
- Seller: Makes goods available at premises, packs goods. No loading, no export clearance.
- Buyer: Loads at pickup, arranges all transport, export and import clearance, insurance, and pays all costs from pickup.
- Best for: Buyers with strong logistics on the seller’s turf or for local pickup.
FCA (Free Carrier) — any transport
Risk transfers when goods are handed to the buyer’s carrier at the named place.
- Seller: Clears export, delivers to the buyer’s carrier or place, loads if at seller’s site.
- Buyer: Books main carriage, insurance, import clearance, and downstream delivery.
- Best for: Most shipments where the buyer wants freight control without export headaches.
FAS (Free Alongside Ship) — sea and inland waterway only
Risk transfers when goods are placed alongside the vessel at the named port.
- Seller: Clears export, brings cargo to the quay or barge next to the ship.
- Buyer: Loads onto vessel, pays ocean freight, insurance, and all costs after alongside point.
- Best for: Bulk or break-bulk cargo where port handling is buyer managed.
FOB, CPT, and CIP: Sharing the Load
FOB (Free On Board) — sea and inland waterway only
Risk transfers when goods are on board the vessel.
- Seller: Clears export, delivers and loads goods on board at the port of shipment.
- Buyer: Pays ocean freight, insurance, and all costs after loading.
- Best for: Container cut at port or non-container loads where onboard timing is clear. Avoid FOB for true door-to-door containers; use FCA instead.
CPT (Carriage Paid To) — any transport
Risk transfers when goods are handed to the first carrier. Seller pays to named destination.
- Seller: Clears export, books and pays main carriage to destination named place. No insurance duty.
- Buyer: Bears risk after first carrier handoff, handles insurance, import clearance, and final delivery if needed.
- Best for: Buyers okay with early risk but who want the seller to pay freight.
CIP (Carriage and Insurance Paid To) — any transport
Risk transfers when goods are handed to the first carrier. Seller pays carriage and insurance to named place.
- Seller: Clears export, pays main carriage, and must buy insurance (minimum Institute Cargo Clauses A recommended).
- Buyer: Bears risk after first carrier handoff, benefits from seller’s insurance cover, handles import.
- Best for: New buyers who want freight paid and insurance included from the seller. See this guide on Incoterms 2020 insurance levels for the CIP vs. CIF difference.
CFR, CIF, DAP, DPU, and DDP: Seller Goes the Extra Mile
CFR (Cost and Freight) — sea and inland waterway only
Risk transfers at loading on the vessel. Seller pays ocean freight.
- Seller: Clears export, loads on board, pays ocean freight to named port.
- Buyer: Takes risk after loading, arranges insurance, handles import and onward move.
- Best for: Sea shipments where the buyer wants the seller to pay freight but not insure.
CIF (Cost, Insurance and Freight) — sea and inland waterway only
Risk transfers at loading on the vessel. Seller pays ocean freight and insurance.
- Seller: Clears export, loads on board, pays freight and minimum insurance to named port.
- Buyer: Takes risk after loading but gets insurance benefit, handles import and delivery.
- Best for: Sea freight when the buyer wants basic insurance included by the seller.
DAP (Delivered At Place) — any transport
Risk transfers at named place of delivery, ready for unloading.
- Seller: Pays and manages transport to named place, clears export. No import duties or unloading.
- Buyer: Unloads, clears import, pays duties and taxes.
- Best for: Buyers who want door delivery without import processing by the seller.
DPU (Delivered At Place Unloaded) — any transport
Risk transfers when goods are unloaded at the named place.
- Seller: Pays transport and unloads at destination, clears export. No import duties.
- Buyer: Clears import and pays duties and taxes.
- Best for: Projects or sites that need the seller to handle unloading at arrival.
DDP (Delivered Duty Paid) — any transport
Risk and cost remain with seller until delivery after import clearance.
- Seller: Pays all transport, clears export and import, pays duties and taxes, delivers to named place.
- Buyer: Receives goods ready for unloading.
- Best for: Buyer convenience. Seller must know local taxes, licensing, and compliance to avoid delays. Use DDP only if you can act as importer or appoint a capable agent.
Pro tip: Match each rule to mode and control. Use FCA, CPT, or CIP for air or multimodal moves. Keep FOB, CFR, and CIF for sea and inland waterway shipping. When in doubt on risk points, revisit a concise primer like this Incoterms 2020 overview.
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