Everyone in the trade business needs to deal with shipping, but it’s not always easy for beginners. Why? Well, FCA incoterms can be both confusing and challenging for those unfamiliar with import and export legalese.
Incoterms are the short form of ‘international commercial terms’, which were created by the International Chamber of Commerce in 1936. There are many types of incoterms out there, but FCA intocterms are one of the most commonly used ones.
As you’ll learn in this article, incoterms dictate who pays for what in a trade agreement. Different incoterms such as FCA, ExW, and CIR have different specifications. As such, the distribution of expenses involved in freighting goods internationally is different in each incoterm.
For FCA, the legalities can be tricky, so you should know all key details about the FCA freighting processes. If you’re looking to reduce shipping costs, such knowledge is even more important.
Here is a complete FAQ guide to FCA incoterms:
Firstly, let’s define the Free Carrier (FCA) incoterm. An FCA freight agreement essentially means that the buyer chooses the carrier in the freight delivery. The seller only has to deliver the goods at the carrier’s location, which is typically the nearest port.
Accordingly, in an FCA contract, sellers are only responsible for the quality of goods and cargo expenses until the carrier has received the delivery. From then, the buyer bears the responsibility of quality checks and import costs.
If you’re a buyer, you might prefer FCA agreements as you have more control in the process. You can choose carriers who are priced within your budget. However, FCA arrangements also mean that you assume most of the risk.
Since you’re responsible for quality checks after the time of export, your seller won’t compensate you if something goes wrong. Apart from the risk, the process also involves intense research and verification. You don’t want to hand over freight responsibilities to just any carrier.
Considering all this, you should weigh the pros and cons of FCA shipments. It can be a smart shipment method, depending on your needs and product type.
Overall, the buyer covers the costs in FCA incoterms freight. As the buyer chooses the carrier and assumes most of the responsibility, he or she will cover all costs after the delivery has been received by the carrier.
The seller only covers the delivery costs to the carrier. For example, if you’re buying from a Chinese company under an FCA agreement, your supplier will arrange for your shipment to reach the nearest location where your carrier can claim it.
This location is usually the nearest port. Manufacturers may be required to use cargo trucks, trains, and even planes to transport your delivery there.
Now, FCA is only one example of incoterm agreements. Another common agreement is the FOB incoterm. Free On Board (FOB) shipments are a subset of FCA shipments, involving similar payment methods. The buyer covers most of the shipment costs.
However, there are still a few differences you should note:
Firstly, you should know that there’s a difference in shipment time. FCA goods are only shipped when received by the carrier. However, FOB goods are not necessarily given to a third party. The buyer can choose to have the seller ship the goods directly.
Another key difference is shipment type. FCA shipments can be on any mode of transport. From airplanes to trains, you can have your shipment loaded on the most convenient option available. However, FOB shipments are usually dispatched at sea.
Also, FOB shipments usually require one shipment mode. With FCA, buyers need the versatility of multiple transport modes. This is because they may need more than one form of transport to receive the shipment.
For example, US-based buyers importing from China can fly their shipment on an airplane. However, they may need a loading truck or train to take the shipment to their final destination.
FCA incoterms work in two ways. The first is straightforward whereby the buyer hires a reliable transport company to whom the seller gives the goods. In this scenario, the seller usually delivers the goods to the transport company.
In the second method, the transport company picks up the goods from the seller’s place of origin. This removes almost all of the risk and liability from the seller, which is why some manufacturers may prefer this method.
However, the seller is still responsible for quality assurance at the time of exchange with the transport carrier. The seller also remains responsible for export clearance and its related costs.
Now, FCA is also confused with ExW or Ex Works at times. However, like FOB, Ex Works is an entirely different incoterm. Here are the comparisons between FCA and ExW:
Unlike FCA, in Ex Works arrangements, the buyer is responsible for the transport of goods from a to z. If you sign an Ex Works contract, you’ll have to pick your shipment at the seller’s location (usually the factory or company warehouse).
You’ll also be responsible for loading the goods into the nearest freight. This means you’ll have to take care of both the import and export costs. Not all buyers can do Ex Works arrangements. Buyers need both import and export certification to qualify.
All in all, you can think of FCA systems as a 80/20 division of liability between the buyer and seller. Ex Works systems involve a 100/0 division.
The answer is yes. Unlike FOB and a few other incoterms, FCA arrangements have no transport restrictions. You can have FCA arrangements for air, sea, rail, and road freights. As mentioned, this system gives you more versatility.
As mentioned, FCA stands for Free Carrier. The abbreviation takes up the ‘F’ in ‘Free’ and ‘CA’ in ‘Carrier’. In the trade industry, ‘free’ refers to a seller’s obligations to ship goods to an agreed location. Moreover, ‘carrier’ indicates the third-party transporter hired by the buyer.
FCA Origin is simply another term for FCA arrangements. It refers to the seller’s responsibilities at the origin of shipment.
All incoterm arrangements include customs clearance. FCA is not an exception. All goods will undergo customs clearance twice at the time of export and import processing.
Under FCA Incoterms, the seller is responsible for export duty, taxes & customs clearance, and the buyer is responsible for import duty, taxes & customs clearance.
If you’re interested in sea freight, you must have heard of Cost Insurance Freight or CIF incoterms. How do CIF processes diverge from FCA? Well, there are two main ways.
CIF agreements disperse most of the shipment responsibilities to the seller. Sellers must dispatch the goods to different ports. Like FOB incoterms, the shipment method is primarily through the sea route.
The seller must ensure that the goods reach the destination port safely and soundly. From there onwards, the buyer assumes responsibility for any potential mishaps or damages.
However, you can only qualify for a CIF contract if your goods can’t be transported in containers. You don’t have such restrictions with FCA contracts.
The seller is always responsible for export clearance. The type of incoterm arrangement doesn’t matter. If a seller is dispatching products to a different country, they must undergo a series of steps, including providing a trade certificate that permits them to trade with their client’s country.
The buyer is responsible for packaging, loading, shipping, taxes, and duties for import. Therefore, once the package has been dispatched from the seller, all subsequent charges fall on the buyer.
Both the buyer and seller must ensure custom clearance in FCA. The seller must do so during the export clearance process. This is to ensure that the goods were secure at the time of dispatch.
Once the goods arrive, the buyer must pay for import clearance, which includes a repeat of customs clearance to ensure no damage or loss occurred during the shipment.
FCA charges include import and export charges. The details of these charges may differ, depending on the country of origin and type of shipment. However, the import and export duties remain the same.
Another common comparison is made between FCA and CFR (also known as Cost and Freight). CFR is the exact opposite of FCA shipment agreements. In CFR, the seller arranges transportation and covers freight costs.
The mode of transport doesn’t matter. Instead, the type of shipment is more important. If you’re ordering goods in bulk that can’t fit in a cargo container, your seller will arrange other modes of delivery.
In doing so, the seller takes charge of export expenses, including the fee of acquiring export licenses to different countries. Most of the liability falls onto the seller until the goods have reached their final transport vessels.
Once the final hand off is complete, the buyer takes the reins. The seller will no longer hold liability if something goes wrong.
If you don’t know, prepaid and collect are the payment methods involved in international freight costs. As the name implies, expenses in prepaid shipments are covered before dispatch. This means the dispatcher (i.e. the seller) is responsible for the payment.
Similarly, in collect shipments, the fees are ‘collected’ after the dispatch is complete. This makes the receiver (i.e. the buyer) responsible for the shipping costs. As such, FCA shipments usually have collect payment agreements.
However, this isn’t necessary. A buyer can reimburse a seller for covering prepaid costs. It depends on the agreement you’ve negotiated with your respective seller.
Simply put, you should carefully evaluate your FCA incoterms to ensure your contract meets your needs. Navigating incoterms can be challenging, which is why many buyers and sellers get professional advice from trade consultants. As such, don’t be afraid to ask for help.
However, with this article, you’ve found everything there’s to know about FCA agreements. As such, you can make more informed choices next time you speak to a potential seller.