Two short strings of letters cause more friction between brands and manufacturers than any other part of a commercial agreement. The payment structure determines when money moves and what happens if it moves and the goods do not. The Incoterm determines where the cost and the risk of the shipment transfer from the manufacturer to the brand.
Both are frequently recorded incorrectly, sometimes in a single line at the bottom of a quotation, and both have consequences that only surface when a shipment is delayed, damaged or held at customs. The cost difference between two Incoterms on the same order can be substantial and is often invisible until the invoice arrives.
This article explains the Incoterms most used in cosmetic supply, how payment structures work in practice, how currency and customs fit in, and what to record in writing.
Incoterms and what they actually govern
Incoterms are standard international commercial terms published by the International Chamber of Commerce. Each term is a three-letter code that allocates defined responsibilities between the seller and the buyer: the cost of each stage of the journey, the point at which risk transfers, who arranges carriage, who arranges insurance and who handles export and import clearance. The current edition is Incoterms 2020, and the edition should always be stated alongside the code, because the definitions have changed between editions.
The single most important distinction is between cost and risk. Two terms can allocate the costs of the journey in the same way while transferring risk at different points, and a term that gives the buyer a lower invoice can give it a much larger exposure. Reading only the cost side of a term is how brands end up uninsured at the moment a problem occurs.
A second structural point is that some terms are only for sea and inland waterway freight while others apply to any mode. Using a sea-only term for an air or road shipment creates ambiguity that the parties often fail to notice until a claim arises.
The terms used most in cosmetic supply
A handful of terms covers most cosmetic transactions, and each has a practical consequence for a brand.
| Term | Risk transfers | Seller arranges | Practical consequence for the brand |
|---|---|---|---|
| EXW | At the seller's premises when the goods are made available | Almost nothing | Lowest invoice but the brand becomes responsible for export clearance, which can be impossible for a foreign buyer |
| FCA | When the goods are handed to the carrier nominated by the buyer | Export clearance and delivery to the carrier | Often the cleanest term for air and road; works for containerised sea freight where goods are delivered to a terminal |
| FOB | When the goods are on board the vessel | Export clearance and delivery to the port and onto the vessel | Sea-only. Not the same as the old ship's rail definition, and not appropriate for air freight |
| CFR | When the goods are on board the vessel | Export clearance plus freight to the destination port | The brand still arranges insurance, and the risk sits with the brand from the moment of loading |
| CIF | When the goods are on board the vessel | Export clearance, freight and minimum-cover insurance | Insurance is only at the minimum cover level, so the brand often needs to buy more |
| CPT | When the goods are handed to the first carrier | Export clearance and carriage to the agreed destination | Any mode. Note that risk transfers earlier than many brands expect, at the first carrier |
| CIP | When the goods are handed to the first carrier | Export clearance, carriage and higher-cover insurance | Any mode. Carries a wider insurance requirement than CIF |
| DAP | When the goods arrive at the named destination | Everything up to arrival, excluding import clearance and duties | The seller carries the risk for the whole journey, which makes it the most protective term for the brand |
| DDP | When the goods are available at the destination, cleared for import | Everything including import duties and taxes | Most convenient for the brand, but the manufacturer becomes the importer of record, which it may not legally be able to do in every market |
Two observations follow from the table. FOB and CFR are sea-only and are frequently misapplied to air shipments, where FCA and CPT are the correct choices. And EXW looks cheapest because the invoice excludes freight and insurance, but it places export clearance on the buyer, and a foreign buyer may have no legal ability to act as the exporter of record in the manufacturer's country at all.
How the choice changes the real cost
Comparing two quotations that use different Incoterms without normalising them is a common error, and it can lead a brand to select the more expensive option while believing it chose the cheaper one.
The cost components that move between terms are export clearance and documentation, domestic transport to the port or terminal, terminal handling, freight, insurance, import clearance, duties and taxes, and delivery to the final address. A quotation on FOB that excludes freight and insurance cannot be compared directly with a DDP quotation, and the difference is the entire international leg plus the customs cost.
The practical approach is to request quotations on a single named term, or to request two terms and normalise the difference against a freight and duty estimate. The second approach is more work but it exposes the question of who can obtain better freight rates, since a manufacturer shipping regularly into a market may negotiate rates a first-time brand cannot, which can make the higher term genuinely cheaper.
Payment structures
Payment terms in contract manufacturing usually reflect the cash cost of production, which is why deposits are the norm.
The common structures are payment in advance for a first order or a small order, a deposit with the balance against documents or on shipment for established relationships, and open account terms with a defined credit period for long-standing customers. A deposit is not simply a trust mechanism; it funds the raw materials and packaging that the manufacturer has to buy before production begins, and a brand that refuses any deposit is asking the manufacturer to finance its inventory.
The commercial points worth agreeing in writing are the deposit percentage and what it is applied to, the trigger for the balance payment, whether the balance is due on shipment or on arrival, and what happens to the deposit if the brand cancels or if the manufacturer fails to deliver. The last of these is the one most often omitted and the one that matters most in a dispute.
Letters of credit and other instruments
Where the value is large or the parties are new to each other, an instrument that substitutes a bank's undertaking for the buyer's is often used.
A documentary letter of credit obliges the bank to pay against a defined set of documents rather than against the goods, which is why the document list is the critical detail. If the letter of credit requires a certificate of analysis and the manufacturer issues a different document, the bank will not pay, regardless of whether the goods are correct. The document set should be agreed by both parties before the credit is opened, and the description of the goods in the credit should match the commercial invoice exactly.
Other instruments include documentary collections, which are cheaper and less certain than a credit, and credit insurance, which allows a manufacturer to offer open account terms while transferring the non-payment risk. For a first transaction, a straightforward deposit against documents arrangement is often more practical than a letter of credit, and considerably less likely to be held up by a documentary discrepancy.
Currency and exchange exposure
Cross-border supply creates a currency exposure that someone has to carry, and the agreement should state who.
Where the manufacturer quotes in its own currency, the brand's cost in its own currency moves with the exchange rate between the quotation and the payment. Where the manufacturer quotes in the brand's currency, the manufacturer carries the exposure and prices it into the quotation, which is why the same product quoted in two currencies is rarely a simple conversion of one into the other.
The practical responses are a quotation valid for a defined period, a stated mechanism for revisiting the price if the exchange rate moves beyond a threshold, and for larger volumes a forward contract through the brand's bank. The important point is that the exposure exists whether or not it is recorded, and recording it prevents an unpleasant surprise at the first invoice after a rate move.
Duties, taxes and customs
Import cost is not limited to duty. The customs value typically includes the goods, the freight and the insurance, so a lower Incoterm reduces the invoice but not necessarily the duty base. Value added tax or an equivalent is usually recoverable by a registered business but has to be funded in the interim, which is a cash flow consideration rather than a cost. And classification of the goods determines the duty rate, so a product classified under one code rather than another can carry a materially different cost.
Two practical points are worth acting on. Confirm before the first shipment which party is the importer of record, because it determines who is legally responsible for the declaration. And confirm the duty rate and any product-specific import requirements for the target market in advance, because cosmetics are subject to registration or notification requirements in many markets and a shipment can be held for a documentation reason rather than a customs one.
What to put in writing
Five items should appear in writing in a quotation or in the agreement itself, and each removes an ambiguity that otherwise surfaces at the worst moment.
The Incoterm with its edition and the named place, because the same term without a place is incomplete. The currency and the validity period of the price. The payment structure including the deposit, the balance trigger and the treatment of the deposit on cancellation. The document set to be provided with each shipment. And the party responsible for import clearance and for any product registration in the destination market.
Two further items are worth adding for a first order. The packing specification, including the pallet dimensions and any marking requirements, since a shipment that arrives in an unplanned configuration can incur storage or rehandling cost. And the agreed method for calculating the fill weight and the net content tolerance, since a discrepancy here can lead to a duty or a labelling question.
Frequently asked questions about payment terms and Incoterms
Which Incoterm should we choose?
For a first order, a term where the manufacturer handles export clearance and the brand handles import is usually the most practical, such as FCA or CIP for air and multi-modal freight, or FOB and CFR for sea. The choice should be made explicitly rather than inherited from the quotation.
Is EXW cheaper?
The invoice is lower because the seller does almost nothing, but the brand then has to arrange export clearance, which it may not be able to do as a foreign entity. The apparent saving is often not real.
Is a deposit normal?
Yes, particularly for a first order, because it funds the materials the manufacturer has to buy before production. What matters is what the deposit is applied to and what happens to it if the order is cancelled.
Should we use a letter of credit?
It is worth it where the value is large or the parties are new to each other, but only if the required documents are agreed in advance. A document discrepancy delays payment even when the goods are correct.
Can you quote DDP?
Where it is legally possible in the destination market we can quote it, though in some markets the manufacturer cannot act as the importer of record. Where that is the case we will propose the closest workable alternative.
Next step: agree the term and the payment structure up front
If you are placing a first order or renegotiating terms, tell us the destination, the volume and the timing you need, and we will quote clearly on a named Incoterm with the payment structure and document set stated. Write to capsulebiotech@163.com, message the right team on WhatsApp: Capsule Series (capsules only) +86 158-7655-5319, Cosmetics Series (serum, hair care, body care, fragrance) +86 158-7655-5319, or use the inquiry form and we will reply within one working day.
Related programmes and guides: firming face cream, Moroccan hair oil capsules, and our guides to manufacturing contract terms and export documentation and shipping requirements.