Marine finance is a rather complicated subject and in almost all cases requires legal advice and professional assistance of a financial consultant. There is quite large difference in the level of complicity for boat or yacht finance and commercial ship finance. With over 15 years experience in marine finance, ship registration and marine insurance our staff will work with you to tailor a loan package that meets your individual needs.
Boat and Yacht Finance
Choosing a boat or a yacht that is right for you requires careful research, common sense, balancing of your requirements and of course, money. If you can arrange finance before you start shopping for your boat, you will be in a far stronger position to bargain for the best price with the vendor. Knowing of how much you can borrow will enable you to select boat that fits your budget.
There are many ways to finance a boat, from the traditional to the creative. Some traditional sources for both new and used boat financing are direct loans from banks, finance companies, credit unions and savings institutions. Often the yacht broker you are working with will refer a marine finance company. As in any loan, key items to you need to be aware of are the money you need to contribute, interest rates, terms, and the small print.
After you have decided on the source of the loan you will need to be “approved” which means that the lender will evaluate your ability to pay it back. Related paperwork can be called a “loan application”, “finance application” or “credit application”- take your time to complete this form completely. This is also a good time for your credit report checkup. Most lenders will require proof of income, credit information and other personal information.
The interest rate you will pay can be either fixed or variable. If you want to know what your monthly payment will be and have it stay that way, find a fixed rate loan. The other choice you may have is whether the interest is calculated on a per day basis, i.e., you pay for the time you borrow the money or if it has been calculated over the life of the loan. Also, be aware of any early payoff penalties or fees.
Determine how long you want to be pay for the purchased boat or yacht. The “term” of the loan usually ranges between 5 to 15 years for most boat or yacht finance. The amount of down payment can depend upon the lender – the maximum amount being financed by a lot of lenders at this time is 75 – 70 %. While estimating this percentage, the lender will take into consideration such factors as the age of the boat, what you plan to do with it, if it is registered with the state in which is home ported and where you are going to be taking it.
The commercial banks shipping loan policies as a whole contain a uniformity regarding their strategic approach. Different factors affect the activity of the individual bank though. All financial institutions generally tend to specialize on specific types of loans and markets operating a structured loan portfolio, developing their experience and confidence in their ability to manage credit risk. Banks’ credit policies are not the same, neither is their stance against credit risk. Some banks, while defending their shareholders’ best interests, are more conservative than others.
Loan practices may vary for a number of reasons. Shipping loan appraisal is performed by humans not machines. Thus, the greater part is based on personal judgment. No loan officer predicts future developments 100% accurately. So, people with different experience come up with different evaluations against specific requests. In order to achieve a more unbiased stance, credit institutions assemble the pursuits and the requirements regarding finance in an issue called ‘credit policy’ booklet.
In detail, a credit policy booklet quotes extensively on the following key points:
Tenor: the length of the loan. On types of loan such as balloon payment, not all installments have the same size. If all were equal then perhaps an 8-year loan would be fully repaid at, let’s say 10 years. It is said then that the 8-year loan has a 10-year profile. This is called ‘amortization’. The reference on the maximum acceptable period of the loan may be stated with any of the following expressions: maximum loan repayment, maximum age of ship at the end of the loan, maximum loan profile. The reference may alternatively have to do with the 3 rd special hull survey – it is another way of implying a 15-year-old ship.
Gearing: is the ratio of the loan to the asset value. Varies from 40-80% depending on the ship type, employment, collateral, age, competition from other banks and general lending policy. One typical general intentions list, which is rather optimistic is displayed here:
- New buildings - 80%
- 2nd hand – 70%
- Special – 75%
- New passenger ships – 75%
- Over aged passenger ships – 50%
Repayment schedule: usually equal installments over the period of the loan. In the London or the Eurodollar market, installments are usually every three or six months.
Currency: most commercial banks lend in U.S. dollars or other major currencies. This presents the borrower with currency risk. A prudent choice is that the loan be issued in the same currency with the expected cash flow.
Interest rates: most financing by commercial banks is done on a floating rate basis. They lend at a spread over the rate at which they borrow, six month LIBOR 1 being the most common. Typical spreads range from 0.5% to 2.5% over LIBOR or EURIBOR according to the standing of the borrower etc.
Fees: where a standby period is involved, the bank will customarily charge the creditor a commitment fee; there is also arrangement for a front end fee.
Syndication of shipping loans: may be used to spread the risk of a large loan among several participating banks.
Security: the security sought against the loan may include the following: employment, first mortgage, second mortgage, assignment of income, assignment of the insurance, personal or corporate guarantees and security maintenance clauses. It should be noted that the greatest of all securities is the expected cash flow. If the ship brings money to the owners they will be able to repay the outstanding loan as fast as planned and the investment will have yielded a hundred per cent.
The commercial bank to enhance security on its risk management basis acquires information and monitors the following:
- Evaluation of the market prospects.
- Operational plan of the shipping company.
- Credit policy adjustments to better suit the current pursuits.
- Competition quality of services.
- Relationship banking.
- Portfolio distribution and allocation.
- Minimum acceptable yield.
We invite you to Contact DeltaQuest Group for the options available and initial consultations.