Non-traditional Sources May Be Friendlier Options, Says Devandran Karunakaran
The shipping industry is cyclical, and commercial ships are expensive investments. Potential lenders sometimes view the business as risky and view smaller operations as being the riskiest.
Because of these factors, traditional maritime financing sources often aren’t available to owners of small and medium-sized ships. However, these business owners can fund the purchase of new vessels through other means.
Table of Contents
Banks
Although banks are a traditional funding source that tends to cater to larger businesses, they can be the source of financing for smaller ship purchases in certain economies and countries. For example, Greek banks can service smaller loans. Owners of smaller ships in countries where the maritime industry is significant may be able to secure loans at reasonable rates, says Devandran Karunakaran, a technical lawyer specializing in ship financing.
IPO
Some shipping companies can consider a public offering of stock to be traded on a national stock exchange. Companies must provide a prospectus and detailed financial information per their country’s regulatory system. Companies will also typically pay fees to register before filing their IPO. IPOs can be effective in some situations but require careful preparation and time.
Private Placement
One of the most popular non-bank financing sources for owners of small and medium-sized ships is the private placement of debt or equity. Private placement involves selling shares or bonds to private groups of investors or institutions such as insurance companies or pension funds. It can be a relatively quick way to obtain the necessary capital.
An attorney or investment banker specializing in ship funding will handle the placement. Shipping companies will need to prepare a prospectus and provide financial information. Most countries have little regulation of private placements compared to public stock offerings.
“The downside of a private placement is that these investors or lenders will expect a high return on their investment, however, if you can demonstrate those higher returns, private placement is an excellent financing option.”
Leasing
Leasing is another option. Terms vary. In the Japanese market, leases with call options are becoming popular; for example, an LNG carrier might have a 10-year charter with an option to buy the vessel at the end of the term and lease payments applied toward the purchase price, he says.
Government-Backed Financing
Some governments offer programs to help finance ship purchases. The U.S. Department of Transportation Maritime Administration offers a loan guarantee program for building or refurbishing many types of commercial vessels. The U.S. federal government also offers loans through the Federal Financing Bank.
Digital Options
At least one company offers the opportunity to buy fractional shares of commercial vessels on the metaverse. The company, Infinity Maritime, gives higher ratings to eco-friendly ships. This funding type isn’t yet mainstream, so its effectiveness has yet to be determined. He says it has made it onto Lloyd’s list of 10 shipping funding options.
