INTRODUCTION TO MARINE FINANCING
The term “Marine financing” covers a variety of transactions involving the purchase or sale of maritime equipment. We are principally involved in “owner financing” or “alternative financing”. Before going into the type of financial management that we do, it is important to understand conventional or standard financing.
Conventional Marine Financing
Conventional marine financing involves a security arrangement with a bank or other lending institution, by which money to purchase a vessel is received in exchange for a security interest in the vessel.
The security interest generally takes the form of a First Preferred Ship’s Mortgage. The borrower executes a “promissory note” promising to pay the loan, as well as, a First Preferred Ship’s Mortgage which pledges the vessel as security for the loan. The note usually obligates the borrower personally so that if the vessel is foreclosed and sold by the lender, the borrower must pay any deficiency if the vessel does not sell for enough to pay the entire loan.
This mortgagor pledges the ship as security for the loan and has priority over most other claims with some specific exceptions.
Types of Lenders
Standard commercial financing depends upon your credit history, amount of down payment and the evaluation of the ship.
Many banks will make such loans if you are a “good” customer and have a credit history with them. This also assumes that they will do marine financing. Due to the crash in the oil field industry during the 1980’s and 1990’s many lenders left the marine market and have not returned.
Marine lending is viewed as a high-risk market due to the nature of the business and the fact that the ship may leave U.S. ports and never return. The fear of seeing their security sail over the horizon inhibits many bankers.
To balance out the risk factors, the banks will look at several things, principally, your credit history and other suitable security such as real estate, cash or investments in addition to the ship.
If you have a long, good relationship with a bank, that should be your first choice. You will be more likely to receive a good interest rate and fair terms. Be aware that you will have to pay the difference between the loan amount and the purchase price of the ship. Your down payment generally will range from 10% to 40% depending upon the requirements of the particular bank.
Generally, the bank will not lend money for
- Start up costs;
- Repairs or refitting;
- Fuel and lube oils;
- Insurance and fees.
Also, the bank will probably be expecting to lend between 60% and 80% of the purchase price of the ship. This means that on a $500,000 purchase, you will need to have between $100,000 and $200,000 in cash to pay for the purchase down payment.
Several of the major engine companies have developed financing programs revolving around the purchase of their propulsion engines and generators. Detroit Diesel and Caterpillar in the United States have been the two major players in this market.
The loan program generally requires the purchaser to either build a new vessel with specific equipment or to repower an existing vessel. Again, the amount of the loan will depend upon a realistic evaluation of your credit status and the value of the vessel upon completion.
Lenders of Last Resort
We consider banks and equipment manufacturers as lenders of first resort because they offer the lowest rates and most competitive terms. They are also the most difficult from whom to obtain a marine loan.
Lenders of the last resort, are, for the most part, private lenders who specialize in “high risk” loans with a very “high rate of return.”
These individuals offer money when you need it, but at interest rates in the 17% to 25% range. Usually, these loans are for twelve months or less and require the borrower to provide personal guarantees for the loan.
The higher rates are justified by the high risk nature of the loans. Generally this type of loan can be completed in a few days or weeks and may, in some cases, save your interest in the ship.
Security for the loan is generally in the nature of a First Preferred Ship’s Mortgage as well as other security such as real estate, bonds or stock shares.
Venture capital is money that is invested by private individual to provide start-up costs, vessel purchase funds and operating costs. The money is invested in a particular ship or project with the purpose of earning profits for the investor.
Generally, venture capital is secured only by the project. If the ship or shipping project fails, the investor loses his investment. There is no other obligation other than the equipment alone.
There may be any variety of combinations of investments in a Venture Capital program, but in the general sense, the investor becomes a limited partner in the ship and takes his chances along with the operator.
In the following, you will see how owner financing fits into this combination of capital raising programs.