Updated September 2026 · 9 min read
Short answer: Incoterms are standard trade rules from the International Chamber of Commerce (ICC) that spell out who pays for shipping, insurance, and customs, and where the risk of loss moves from seller to buyer. For small importers, EXW puts almost everything on you, FOB and CIF split the trip at the ports, and DDP puts almost everything on the seller.
If you’re buying from an overseas factory, your quote will almost always include a three-letter code like FOB or DDP. That code changes your real cost and your risk more than most new importers realize. This guide gives you Incoterms explained for small business owners, in plain English, with a worked example you can use to compare quotes.
Incoterms explained for small business: what are they?
Incoterms (short for International Commercial Terms) are published by the ICC. The current edition is Incoterms 2020, which took effect on January 1, 2020, and it has 11 rules. The ICC updates the rules from time to time, so check that you’re using the latest version, and always write the version in your contract, like “FOB Shanghai Incoterms 2020.”
What Incoterms cover
- Who arranges and pays for each leg of transport
- Where and when the risk of loss or damage passes to the buyer
- Who handles export and import customs clearance
- Whether the seller must buy insurance (only in CIF and CIP)
What Incoterms don’t cover
They don’t set the price, payment terms, when ownership (title) transfers, or what happens if the goods are defective. Those belong in your purchase order or supplier agreement.
What do EXW, FCA, FOB, CIF, and DDP mean?
These five cover most quotes a small importer will see. Think of them as a scale from “buyer does everything” to “seller does everything.”
EXW (Ex Works)
The seller makes the goods available at its own facility. That’s it. You (or your freight forwarder) handle loading, export clearance, the international trip, import clearance, and delivery. Risk passes to you as soon as the goods are available for pickup. EXW quotes look cheapest, but they’re often the hardest and riskiest for small buyers, since export clearance in another country can be tricky for a foreign buyer to handle.
FCA (Free Carrier)
The seller clears the goods for export and hands them to the carrier you choose at a named place, such as its warehouse or a freight terminal. Risk passes to you at that handoff. FCA works for any mode of transport, including containers, air, and trucking.
FOB (Free on Board)
The seller clears the goods for export and loads them on board the vessel at the named port of loading. Risk passes to you once the goods are on board. You pay the ocean freight, insurance, import costs, and delivery. FOB is one of the most common terms in factory quotes. Under Incoterms 2020, it’s meant for sea and inland waterway transport only. For container shipments, trade advisers often suggest FCA instead, because containers are usually handed over at a terminal well before they’re loaded on the ship.
CIF (Cost, Insurance and Freight)
The seller pays for ocean freight and minimum insurance to the named port of destination. Here’s the catch: risk still passes to you when the goods are loaded on the ship at origin, even though the seller paid for the trip. Under Incoterms 2020, CIF only requires minimum insurance cover (Institute Cargo Clauses C), so you may want to buy extra coverage. CIF is also for sea and inland waterway transport only.
DDP (Delivered Duty Paid)
The seller delivers the goods to your named place, cleared for import, with duties and import taxes paid. Risk stays with the seller until the goods arrive, ready to unload. DDP is the simplest for you, but you’ll pay for that convenience in the price, and you have less visibility into how the goods were declared at customs.
Who pays for what under each Incoterm?
| Cost or task | EXW | FCA | FOB | CIF | DDP |
|---|---|---|---|---|---|
| Loading at seller’s site | Buyer | Seller* | Seller | Seller | Seller |
| Export clearance | Buyer | Seller | Seller | Seller | Seller |
| Main (international) freight | Buyer | Buyer | Buyer | Seller | Seller |
| Cargo insurance | Buyer’s choice | Buyer’s choice | Buyer’s choice | Seller (minimum) | Seller’s choice |
| Import clearance and duties | Buyer | Buyer | Buyer | Buyer | Seller |
| Delivery to your door | Buyer | Buyer | Buyer | Buyer | Seller |
| Risk passes to buyer | At seller’s site | At handoff to carrier | On board at origin port | On board at origin port | At your named place |
| Transport mode | Any | Any | Sea only | Sea only | Any |
*Under FCA, the seller loads the goods if delivery happens at the seller’s premises. If delivery is somewhere else, the buyer’s carrier generally handles unloading from the seller’s truck.
How do you compare an FOB quote with a DDP quote?
Never compare the unit prices alone. Add up everything you’d pay to get the goods to your door, then compare.
Worked example (hypothetical numbers, 1,000 units):
FOB quote: $5,000 for the goods
+ Ocean freight: $1,200
+ Cargo insurance: $50
+ Import duties (example rate): $250
+ Customs broker and fees: $200
+ Delivery from port to your store: $300
= Total landed cost: $7,000, or $7.00 per unit
DDP quote: $6,800 delivered, or $6.80 per unit
In this example, DDP is $200 cheaper and less work. With different freight or duty costs, FOB could win. Run the math every time.
For a full breakdown of each cost line, see our guide on how to calculate landed cost per unit.
Which Incoterm should a small importer choose?
At a glance: picking your Incoterm
1
First import, no forwarder? Consider DDP and compare its total cost.
2
Have a forwarder? FOB or FCA gives you more control over freight.
3
Shipping in containers? Ask about FCA instead of FOB.
4
Offered EXW? Ask for FCA. It avoids export clearance headaches.
Many small importers start with DDP for simplicity, then move to FOB or FCA once they have a reliable freight forwarder. A forwarder books space, coordinates pickup, and often arranges customs brokerage. Learn more in what a freight forwarder does.
Don’t forget the customs side
Under every term except DDP, you’re responsible for U.S. import clearance. Commercial imports generally need a customs bond, and most small importers hire a licensed customs broker to file the entry. Our guide to customs bonds explains the options. This is general information, not legal or customs advice; check with CBP or a licensed broker for your shipment.
What Incoterm mistakes should you avoid?
Checklist: getting Incoterms right
- ✅ Always name a specific place (“FOB Ningbo,” not just “FOB”)
- ✅ Add the version: “Incoterms 2020”
- ✅ Use FOB and CIF only for sea or inland waterway shipments
- ✅ Don’t assume CIF means you’re insured end to end; check the coverage
- ✅ Confirm who pays destination port and terminal charges
- ✅ Put the same Incoterm on the quote, purchase order, and invoice
- ✅ Remember Incoterms don’t cover payment or product quality
FAQ
What is the best Incoterm for a small business importer?
There’s no single best one. DDP is simplest for beginners, while FOB or FCA usually gives more control and can cost less once you have a freight forwarder.
Is FOB the same as “free shipping”?
No. Under FOB, the seller covers costs only until the goods are loaded on the ship at origin. You pay the ocean freight and everything after it.
What’s the difference between CIF and CIP?
CIF is for sea shipments and requires minimum insurance cover. CIP works for any transport mode and, under Incoterms 2020, requires a higher level of cover (Institute Cargo Clauses A).
Do Incoterms apply to domestic shipments?
They can, but domestic U.S. deals often use other shipping terms instead. If you use an Incoterm domestically, write it out clearly in your contract.
Bottom line
Incoterms tell you who pays and who carries the risk at every step. EXW puts nearly everything on you, DDP puts nearly everything on the seller, and FOB, FCA, and CIF sit in between. Always name the place and the version, compare quotes on total landed cost, and pair your chosen term with a good forwarder and customs broker.
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