Taking risks is an essential component in every business activity. But it doesn’t mean plunging right away to any given opportunities without thinking it over. Every business owner has to take measures to minimize both business risks and market risks. Unfortunately, the shipping industry is incapable of distinguishing such risks.
In fact, shipping is considered a high-risk industry and it is attributed to several factors. However, the most apparent one is the movement of the freight markets. Freight rates have a direct impact on the income of shipping companies, which also significantly affect its ability to get financing.
Although freight rates have increased from 2017 up to date, financing remains a problem for every shipowner. Thus, we’ve highlighted below some of the shipping industry’s financing difficulties and possible ways to cope with them.
The Impact of Freight Rates
Freight rates play a vital role in the shipping industry because they determine the income to a shipping company. Note that shipping lines earn their revenues by charging their shippers and receivers by freight rates. Such earnings make a difference to the shipping company’s value.
When the freight rates are high, the revenues to the shipping company will also be high. As a result, the stock will also increase in value. But if the freight rates are low, the opposite happens. Due to the corresponding extreme changes in revenues, cash flow performance and asset values, the usual means of financing for shipping companies are also disrupted.
Financing Concerns In The Shipping Sector
Knowing the financing concerns in the shipping sector is the first step to coping. As a capital intensive industry, shipping companies have substantial needs for funding. But because most of its financing comes in the form of bank debt, the shipping industry has limited possibilities to diversify its sources of funding.
Since the global financial crisis in 2008, banks that specialize in shipping have encountered capital, credit and bailout problems. The number of active shipping banks has fallen sharply. From 84 percent, the share of bank lending to the shipping industry has reduced to 63 percent by 2014.
Although there are remaining banks in the business, most are spending more time restructuring existing loans than creating new ones. They have also been depriving shipping loan portfolios as fast as practically possible. Besides that, the volumes and maturities of loans are significantly shorter compared to the pre-crisis period.
But when the market and vessel prices are high, many banks appear more willing to lend to shipping companies even if the market is expected to fall back into lower levels. Even if the high level of US debt in consumers signals economic growth, shipping loans have remained to be more expensive for borrowers.
Ways To Cope With Financing Difficulties
Recognizing the financing concerns in the shipping industry, it is important for shipping companies to consider new approaches to funding capital budgeting projects.
Here are the ways shipping companies can cope with its long-time difficulties in getting financing.
Hedging Vessel’s Value
Vessel is the main asset of shipping companies. That’s why their market value plays an important factor in analyzing the shipping company’s value. Note that the vessel asset prices determine whether a shipping firm has sufficient collateral support to get financing from a bank.
The good news is that shipowners can hedge vessel’s value by diversifying fleets. Doing so allows shipping companies to operate in different markets. Although it’s challenging and makes the business vulnerable to distractions, it can increase their chances to sustain their better levels of earnings compared to focusing on a specific market.
Employing Leasing Solutions
Without adequate security or a good credit rating, financing institutions would be reluctant to finance ship acquisition. Fortunately, financing vessels through leasing is a possible option for shipping lines. But in the leasing solutions, usage of tax benefits is what stimulates investments. Thus, a shipping firm must know how to use different tax systems the most.
Exploring The Capital Markets
Capital markets are a viable financing alternative for shipping firms. Because they are able to issue debt with longer maturities and fixed interest, a shipping company can gain more advantage from them. There are capital management companies that generate funds worth specifically for the shipping industry.
But since capital markets are driven primarily by sentiment and availability, shipping lines that want to access these markets will need time to prepare. By doing this, they can take action fast when an opportunity turns up.
Enhancing Partnerships
The opportunities of financing are dependent on the performance of the shipping industry. Since oversupply continues, shipping lines must sustain their profits through enhancing partnerships. For instance, collaborative shipping allows shipping companies to reduce their costs and enhance logistics sustainability.
Through collaboration, they can have access to larger vessels and eventually provide growth markets. Because a higher market value means the earnings increases, getting financing will be less of a burden. With the Digital Freight Alliance, you can partner with freight forwarders around the world and get the best online tools to accelerate your business growth.
Conclusion
Like other industries, shipping lines have their own fair share of financing difficulties. But by exploring enhancing collaboration and exploring different alternative sources of funding, the shipping industry would be able to cope with the pressure and challenges brought by its volatile markets.
