Incoterms: What they do—and don’t—cover in global trade

Imagine you’re shipping a container of goods halfway across the world. You’ve done your part—packed, labeled and handed it off, but somewhere between the dock and the buyer’s door, something goes wrong. Who’s responsible? Who pays? And how do you make sure you still get paid? 

In international trade, credit extension is more than a matter of trust—it’s about securing payment in an environment shaped by complex regulations, foreign payment systems and global logistics. One of the key tools credit professionals rely on is International Commercial Terms, or Incoterms.  

Why it matters: These rules help define who bears the cost, risk and responsibility during the shipping of goods. But knowing what Incoterms do, and what they don’t, is essential for preventing disputes and ensuring smooth transactions. 

Incoterms are standardized rules developed by the International Chamber of Commerce (ICC) to streamline the sale and shipment of goods globally. They clarify where risk passes between buyer and seller, what costs are included and what obligations each party has. Updated every decade, Incoterms were most recently revised in 2020. The current structure consists of seven rules for any transport mode (EXW, FCA, CPT, CIP, DAP, DPU and DDP) and four rules for sea and inland waterways (FAS, FOB, CFR and CIF). The Incoterms are defined as follows: 

• EXW: Ex Works (Named Place): The seller makes the goods available at their premises or another named location, and the buyer bears all costs, risks, and export responsibilities from that point onward. 
• FCA: Free Carrier (Named Place): The seller delivers the goods, cleared for export, to a carrier chosen by the buyer at a named place, after which the buyer assumes all costs and risks. 
• CPT: Carriage Paid To (Named Place of Destination): The seller pays to transport the goods to a named destination but transfers risk to the buyer once the goods are handed over to the carrier. 
• CIP: Carriage and Insurance Paid To (Named Place of Destination): Like CPT, but the seller must also provide minimum insurance coverage for the buyer’s risk during transport to the named destination. 

• DAP: Delivered at Place: The seller delivers the goods ready for unloading at a named destination, covering all costs and risks except import clearance. 
• DPU: Delivered at Place Unloaded: The seller covers all costs and unloading up to the named destination terminal, where risk and revenue transfer to the buyer, who pays upon delivery.
  • DAT (Delivered At Terminal): The seller is responsible for delivering goods to a specified terminal at the destination port, and the buyer is responsible for import procedures and further transport. Although DAT is still used in some contexts, it was replaced by DPU in Incoterms 2020.
• DDP: Delivered Duty Paid (Named Place of Destination): The seller delivers the goods to the buyer, cleared for import and ready for unloading at the named place, covering all costs, duties and taxes. 
• FAS: Free Alongside Ship (Named Port of Shipment): The seller delivers the goods alongside the vessel at the named port, cleared for export, with the buyer taking on all risks and costs from that point. 
• FOB: Free on Board (Named Port of Shipment): The seller delivers the goods once they pass over the ship’s rail at the named port, after which the buyer assumes all risks and costs. 
• CFR: Cost and Freight (Named Port of Destination): The seller pays the freight to the destination port, but the risk transfers to the buyer once the goods are loaded onto the ship at the port of origin. 
• CIF: Cost, Insurance and Freight (Named Port of Destination): Like CFR, but the seller also provides minimum insurance coverage for the goods during the main carriage. 

Despite their importance, Incoterms don’t cover every part of a sales agreement. They do not address payment terms, transfer of ownership or contract breaches. One Incoterm, FOB (Free on Board), transfers risk to the buyer once goods pass the ship’s rail. If a vessel sinks moments after loading, the buyer, not the seller, bears the loss. “For a realistic example, due to the collapse of the Baltimore Francis Scott Key Bridge in 2024, many containers were trapped at the port,” said Fred Dons, global head of structured trade finance at Aria Commodities (Zug, Switzerland). “If anything happened before actual shipping, those containers remained under the seller’s risk.” 

Using FOB in certain situations can backfire. “If FOB is used under a letter of credit (LC) that demands shipping documents, the seller faces problems when goods aren’t loaded for months,” Dons said. “Without a bill of lading, and with the LC potentially expired, the seller can’t claim payment. FCA would have been better since risk transfers once goods are handed to the shipping company, not when loaded onto the vessel.” 

Matching the right Incoterm to the shipping method and LC requirements is critical. Since LCs operate independently from the sales contract, they only verify that documents match the LC terms, not that the goods were properly shipped. If terms aren’t aligned, payment can be denied. A common mistake credit professionals can make is agreeing to an FOB Incoterm when the buyer controls shipment. “If the buyer is a bad actor, they can withhold or manipulate the shipping documents,” Dons warned. “So, if you do use FOB, make sure you control the documents or that the LC doesn’t require them.” 

When a buyer fails to collect goods on time under Incoterms like EXW, FCA, FAS or FOB, the seller risks missing LC deadlines. “Never release goods until the LC has been extended if a delay occurs,” Dons advised. Incoterms “D” terms, also known as “arrival” terms, dictate that the seller is responsible for delivering goods to a specified location, where the risk and cost of delivery are transferred to the buyer. The “D” terms include DAP, DPU and DDP, which pose risks for the sellers, especially when tariffs change. “If overnight tariffs increase, the buyer may refuse to pay. You’re then stuck with the goods and the additional cost.” 

For credit managers, understanding Incoterms is non-negotiable. “The ICC offers training, but even a visual chart showing when risk transfers and who covers freight costs is invaluable,” said Dons. “Before agreeing to an Incoterm, understand what it truly means. For example, EXW might seem simple, but it puts all responsibility on the buyer and gives the seller no access to shipping documents—potentially a major issue if documents are required under an LC.” 

Economic instability and geopolitical risks have led to stricter banking requirements under LCs. That’s why it’s crucial to specify the Incoterm version being used, whether that’s 2020, 2010 or older. “Use the correct term,” Dons concluded. “Use FCA instead of FOB, CFR instead of CIF, especially when insurance responsibility shifts. The details matter.” 

Due to such risks, credit professionals are adapting their practices. “Yes, tariffs have changed how we use Incoterms,” said Dons. “In trading, we buy FOB and sell CIF. That way, we control the goods as long as possible and ensure proper insurance. But small sellers on platforms like Amazon often use DDP. If tariffs spike, they’re on the hook. That’s why professionals are switching to DPU, leaving import taxes to the buyer.” 

The bottom line: Incoterms are essential in international trade. Misusing or misunderstanding them, especially under LCs, can lead to costly delays, disputes or non-payment. Always match the Incoterm to the actual shipping setup, control the shipping documents when needed, and understand where risk transfers.  

Learn more about working with letters of credit and Incoterms by completing NACM’s Letters of Credit Course, available in the Credit Learning Center (CLC). FCIB’s International Credit and Risk Management (ICRM) course also features extensive coverage on these topics.