Oceangoing cargo ships are expensive. A ship capable of carrying 500 shipping containers can cost $10 million. A large container ship with room for 20,000 shipping containers may sell for more than $100 million. Even the largest shipping companies may struggle to raise this kind of capital, which has historically made financing the most viable option for shipowners. However, periods of uncertainty and global economic downturn have driven many banks out of the market.
Even the lenders who have stayed in the ship financing market are placing stricter conditions on their loans, a trend driven by increasing government regulation and simple economics. Providing funding for shipowners can be risky—a global recession could put a shipper out of business, or the rising cost of fuel could change shipping costs significantly. Many banks are searching for safer investments.
Alternative Financial Providers
No matter what the global economy and the banking industry are doing, shippers still need ships. When traditional financial institutions are reluctant to foot the bill for ship financing, there is an opportunity for other institutions to step in and fill the gap.
How are today’s shipowners dealing with ship financing struggles? Aside from banks and other traditional lenders, there are two important ways that shippers are raising money:
When you get a loan from a bank, you and the lender must agree on the value of what you’re financing and your collateral. In a specialized industry, this can be difficult. Private equity firms have stepped in to fill this need. These specialized lenders understand the risks, rewards, and volatilities of the shipping industry and plan their investments accordingly.
Any company that needs to raise capital may turn to selling shares of stock. This strategy can work well for large companies, but it has a history of mixed results. Investing in a small shipping company may involve more risk than many investors will accept.
Corporate responsibility is a serious concern for many businesses. Shipping uses large amounts of fuel and can generate a lot of pollution. This is a problem for many investors concerned about climate change and other environmental damage. Many lenders attach requirements for Economic, Social, and Governance (ESG) reporting standards to ensure that shippers are making efforts to operate sustainably.