Incoterms 2020 Explained for First-Time Exporters

Incoterms 2020 are eleven standard rules that define who pays for what, and at what point risk passes from seller to buyer, on an international shipment. They don't decide who owns the goods, how you get paid, or what currency you invoice in — just cost and risk. Getting the wrong one, or leaving it off a document, is a common source of confusion between exporters and their buyers.

What Incoterms 2020 Actually Cover

Each rule answers three questions: who arranges and pays for transport, who arranges insurance (if anyone), and at what point the risk of loss or damage shifts from seller to buyer. They say nothing about payment terms, title to the goods, or customs classification — those are separate agreements layered on top.

The 11 Incoterms 2020 Rules

Rules for Any Mode of Transport

• EXW (Ex Works) — seller makes goods available at their own premises; buyer handles everything from there.
• FCA (Free Carrier) — seller delivers to a carrier or place named by the buyer.
• CPT (Carriage Paid To) — seller pays freight to the named destination; risk transfers once handed to the first carrier.
• CIP (Carriage and Insurance Paid To) — like CPT, plus the seller arranges insurance to the named destination.
• DAP (Delivered at Place) — seller delivers, ready for unloading, at the named destination.
• DPU (Delivered at Place Unloaded) — like DAP, but the seller also unloads the goods.
• DDP (Delivered Duty Paid) — seller delivers with import duty and taxes already paid; maximum obligation for the seller.

Rules for Sea and Inland Waterway Transport

• FAS (Free Alongside Ship) — seller delivers goods alongside the vessel at the named port.
• FOB (Free on Board) — seller delivers once goods are loaded on board the vessel.
• CFR (Cost and Freight) — seller pays freight to the destination port; risk transfers once goods are on board.
• CIF (Cost, Insurance and Freight) — like CFR, plus the seller arranges insurance to the destination port.

The Terms First-Time Exporters Use Most

EXW puts minimum obligation on the seller — the buyer arranges export clearance, transport, and everything else from your premises onward. It looks simple, but many buyers find it inconvenient, since few buyers want to handle export formalities in a country that isn't theirs.

FOB is one of the most commonly used terms in sea freight. The seller's responsibility ends once the goods are loaded on board the vessel at the named port of loading — from that point, risk and further costs are the buyer's. Under Incoterms 2020, this is defined as "on board," not the older "ship's rail" language.

CIF extends FOB by making the seller responsible for freight and insurance to the destination port — but risk still transfers once the goods are loaded, same as FOB. That gap (seller pays freight, but buyer bears risk from loading onward) surprises first-time exporters more than any other detail in Incoterms.

Incoterms and Your Documents

Whichever Incoterm you agree to needs to appear consistently — with the named place — on the proforma invoice, the commercial invoice, and (where relevant) the bill of lading. See proforma vs commercial invoice for why these figures need to carry through without unexplained changes. If a letter of credit is involved, the Incoterm on your commercial invoice must match what the LC states — a mismatch here is exactly the kind of discrepancy covered in why export documents get rejected. For shipments where the bill of lading matters most (FOB, CFR, CIF), see our bill of lading guide for how that document interacts with the risk-transfer point.

Common Mistakes

• Using an outdated or vague term — "FOB" for a container shipment booked door-to-door, when CPT or CIP fits the actual arrangement better.
• Leaving out the named place — "FOB" alone is incomplete; it needs a port, e.g. "FOB Mundra."
• Assuming EXW means walking away entirely — most sellers still provide reasonable assistance with export documentation even under EXW.
• Letting the Incoterm on the commercial invoice drift from what the letter of credit or proforma originally stated.

Frequently Asked Questions

Do Incoterms cover payment terms?

No. Incoterms only address cost allocation and risk transfer for transport. Payment terms — sight LC, advance payment, open account — are negotiated separately.

What's the difference between FOB and CIF?

Under both, risk transfers to the buyer once goods are loaded on board. The difference is who pays for freight and insurance to the destination port — the seller does under CIF, the buyer arranges and pays for it under FOB.

Which Incoterm is best for a first-time exporter?

There's no universal answer — it depends on your comfort with arranging freight and insurance, and what your buyer expects. FOB is a common starting point for sea freight because it caps the seller's responsibility at loading, without pushing every export formality onto the buyer the way EXW does.

Whatever term you use, Bilexor keeps it consistent across your proforma, commercial invoice, and packing list from one shipment record. See how it works.