How to Choose the Right Incoterms and Avoid Shipping Risks (Beginner’s Guide)

If you're new to international trade, figuring out shipping terms can be overwhelming. Who pays for what? Who takes responsibility when something goes wrong? That’s where Incoterms come in. These internationally recognized trade rules define the roles of buyers and sellers in global deals, helping both parties avoid misunderstandings and unexpected costs.

In this guide, you'll learn what Incoterms 2020 are, how to choose the best ones based on your situation, and how to avoid common shipping risks.

What Are Incoterms?

Incoterms (International Commercial Terms) are trade rules published by the International Chamber of Commerce (ICC). They clarify responsibilities such as who arranges transport, who pays for shipping and insurance, and when the risk transfers from the seller to the buyer.

The 2020 version includes 11 terms, some of which apply to all transport methods (road, rail, air, sea), while others are specific to ocean freight. Understanding how they work can help businesses reduce risks and optimize their logistics.

For Sellers: Choosing the Right Incoterms

As a seller, your main priorities are minimizing risks, controlling shipping costs, and ensuring a smooth transaction. The Incoterm you choose can significantly impact your responsibilities and exposure to unforeseen problems.

Match the Incoterm to Your Shipping Method

Many sellers mistakenly select common terms like FOB, CFR, or CIF for all shipments. However, these terms are primarily suited for bulk cargo loaded directly onto vessels. If you're shipping by container, especially when using warehouses or inland hubs, better options include FCA, CPT, or CIP. These terms ensure risk is transferred at a practical stage in the shipping process, avoiding extra costs or delays.

Why “C” Terms Offer More Control

Choosing “C” terms—such as CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), CPT (Carriage Paid To), and CIP (Carriage and Insurance Paid To)—gives sellers more control over the shipping process. Since you arrange the freight, you can work with trusted carriers and negotiate better rates. Risk transfers to the buyer once the goods are handed to the carrier, meaning you’re not responsible for damages or delays after that point.

However, shipping costs can fluctuate, so it’s essential to factor in potential increases when setting your selling price. Contracts should clearly outline responsibilities to prevent disputes over delays, additional charges, or storage fees.

The Hidden Risks of FOB

FOB (Free on Board) is widely used but can create challenges for sellers. Since the buyer controls the vessel booking, any delays on their end can leave your goods stuck at the port, leading to unexpected storage costs. Additionally, if the buyer’s shipping agent is unreliable, you could face complications with documentation and cargo release.

To protect yourself, always require the buyer to inform you in advance when their ship will arrive and verify the credibility of any foreign freight forwarder they use. If needed, consider purchasing additional insurance in case the buyer fails to secure coverage.

For Buyers: Selecting the Best Incoterms

Buyers aim to streamline shipping, avoid unnecessary costs, and minimize customs-related headaches. The right Incoterm can ensure a hassle-free transaction while keeping expenses predictable.

Why “D” Terms Make Buying Easier

For buyers who prefer minimal responsibility, DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid) are excellent choices. Under these terms, the seller takes care of everything, from packing and transport to customs clearance and final delivery.

This hands-off approach is particularly beneficial for businesses new to international trade, as it reduces the risk of logistical errors. However, it’s crucial to confirm that the seller’s chosen delivery point is suitable for handling the goods and to stay in contact with the transport provider in case of delays.

The Challenges of EXW

EXW (Ex Works) may seem attractive due to its simplicity, but it places nearly all responsibilities on the buyer. You’ll need to arrange transportation, export and import clearance, and insurance, which can be complicated if you’re unfamiliar with the seller’s country’s shipping regulations.

If a seller insists on EXW, consider hiring a local freight agent near their factory to assist with pickup and documentation. While this adds some cost, it ensures a smoother process and prevents costly delays.

Common Mistakes to Avoid

Choosing the wrong Incoterm can lead to unexpected expenses and legal complications. Always ensure the term aligns with your shipping method, clarify customs responsibilities, and verify insurance coverage. Misunderstandings often arise when buyers assume sellers are responsible for duties or when sellers mistakenly believe they must guarantee final delivery.

Contracts should explicitly state when and where risk transfers, and both parties should double-check all details before finalizing the agreement. Additional clauses can be added to specify who handles unforeseen issues such as shipping delays or customs inspections.

Conclusion

Choosing the right Incoterm isn’t just about following standard practices—it’s about selecting terms that fit your business model and shipping strategy. Whether you’re a seller looking to minimize risk or a buyer wanting a stress-free transaction, understanding these terms can save time and money. If you’re still unsure which Incoterm is best for your business, consulting us can provide valuable insights tailored to your specific trade routes and shipping needs.