A shipment of raw materials arrives at the port of Lagos, but the cargo is damaged. The supplier claims they are not responsible because the goods left their warehouse in good condition.
The importer discovers that the contract was signed under “EXW” terms. This means the importer bore all risk the moment the goods left the factory door.
For many African SME owners, these three-letter codes are treated as boilerplate text. In reality, they determine who pays for freight, who handles customs, and who loses money when a container is lost at sea.
Risk and cost transfer points
Incoterms do not cover the price of goods or the payment method. They specifically define the point where the cost and the risk transfer from the seller to the buyer.
Cost refers to the financial obligation for shipping, insurance, and duties. Risk refers to liability for loss or damage to the goods.
If a Nigerian SME imports machinery under a term where risk transfers at the origin port, any damage during the ocean voyage is the buyer’s loss, regardless of who paid for the freight.
Common terms for African SMEs
Most small businesses deal with a handful of standard terms. Choosing the wrong one can create immediate cash flow pressure.
EXW (Ex Works)
The buyer handles everything. The seller simply makes the goods available at their premises. This is the lowest risk for the seller but requires the buyer to manage complex logistics in a foreign country.
FOB (Free On Board)
Common for sea freight. The seller is responsible for the goods until they are loaded onto the vessel. Once the goods are on the ship, the buyer assumes all costs and risks.
CIF (Cost, Insurance, and Freight)
The seller pays for the delivery to the destination port and provides minimum insurance. However, the risk actually transfers to the buyer the moment the goods are loaded on the ship.
DDP (Delivered Duty Paid)
The seller handles everything, including import duties and taxes, delivering the goods directly to the buyer’s door. This is the most convenient for the buyer but is often the most expensive due to the seller’s added service fees.
Avoiding costly logistics mistakes
A frequent error for SMEs is assuming CIF means the goods are delivered to their warehouse. CIF only covers the journey to the destination port.
Once the ship docks, the buyer is responsible for port clearing charges, terminal handling fees, and local transport. These “hidden” costs can erode profit margins if not budgeted.
Another risk is the mismatch between the Incoterm and the insurance policy. Under FOB, if the buyer forgets to secure insurance before the ship leaves the origin port, they are unprotected against maritime accidents.
Poorly defined terms also impact cash flow. DDP requires the seller to tie up capital in duties and taxes, while EXW requires the buyer to have liquidity for all international logistics upfront.
SME owners should review their current purchase orders and sales contracts. Ensure the Incoterm is followed by a specific named place, such as “CIF Apapa Port, Lagos” rather than just “CIF”.
