Maritime Lending - Applying for a Loan
By Mike Vaughn
As anyone who has tried, obtaining a loan for a marine business is very difficult. Many times the fault is not just with the lender, but also with the business owner.
Commercial lenders by nature are conservative with the old adage being: “they will only lend money if you do not need it.” To some extent this is true.
Lenders must look at a variety of circumstances to determine if the loan is worthwhile. Among the things they will consider will be the following:
- Credit history of the applicant.
- Security for the loan.
- The history of the business.
- Opportunity for success.
- Total risk to the lender.
An applicant must realize that it is up to him to educate the lender as to the nature and extent of his business. Most commercial banks and secondary lenders probably do not fully understand the nature of your business and possibility for success.
Historically, lenders have been very frugal with their loans to the offshore oil industry while the market is poor. When the companies are struggling to stay in business and sustain a good inventory of equipment, money is difficult to find. However, when the market booms and the profit margin soar, the lenders rush in and loan to almost everyone in the business, forgetting about the boom and bust cycle of the oil industry.
This first happened in the late 70’s and early 80’s. In the early 80’s the lenders where faced with monumental losses. By the mid 90’s most of the veterans of the earlier bust cycle were gone and a new generation of lenders jumped into the market where owners where refurbishing and building new vessels at astonishing rates.
Of course the bust of 1997/98 came and the lenders were faced again with owners unable to make payments and a total lack of work for most of the boats. Consequentially, the banks and lenders are again faced with a bleak market and a fear of the marine environment.
Today’s borrower must keep in mind the history of the industry. When the borrower approaches a lender there are a number of things he can do to increase the chances of obtaining a loan.
1. Prepare a Business Plan.
There are a number of business plan programs that will assist you in producing a very professional looking business plan. Remember the business plan is only as good as the thought that goes into it.
Research is very important. Educate the lender as to the broad view of your business. Tell him about the competition, the physical location and opportunities; the way the business can expand and the population to be served. This type of information is also very important to you in preparing the way you will do business.
False assumptions in a business plan are a guaranty of failure. If your ferry will carry 600 passengers, can you really expect to fill every seat on every trip for the first two years?
Reality may be that your company will run at a break-even point or deficiency for one or two years. Do you have the financial resources to carry the company until it becomes solvent?
Most start-up companies assume that they can run the business out of the cash flow. This is usually a false assumption. Most businesses will not generate a self sufficient cash flow for at least 6 months and in many cases it may take up to 2 years to generate a truly self sufficient company.
What are your plans for unforeseen adversities? What happens if you bend a shaft, drop a prop or blow up an engine? Will these relatively minor events cause your company to fail?
Your business plan should provide a realistic cash reserve for unforeseen events. I recommend that you take your worst case scenario and double it. If you can not survive this type of situation, back out of the deal.
You must provide the lender with physical documentation of your project. This may include surveys and inventories of your vessels as well as passenger lists, sales of tickets, taxes paid, etc.
The documentation is proof of the validity of your application. Always be prepared to provide more documentation than the lender will require. If you can not document in some manner each of your assumptions about your business, you will probably not get the loan.
3. Honesty and Forthrightness
Tell only the truth to the lender. Do not exaggerate your business or its prospects. Lenders are very good at looking at the meat of the business.
Invite the lender for a trip on your boat and to see the business in operation or to see where it will operate. Do everything possible to allow the lender to see the opportunity the way you do.
Every business has risk. The lender will be looking to minimize his risk at your expense because you are using his money.
There are some things you can do to minimize the risk to the lender. This may include a formalized exit strategy. This exit strategy is nothing more than a formalized agreement which will set forth certain economic goals which you must meet to obtain complete funding. In one manner it may work as a drawing account from which the borrower obtains funds as his project progresses.
A certain amount is allocated for purchase of equipment and operations and as a certain number of trips are made or passengers carried, additional funding is released. This allows the lender to tailor his risk based upon your success.
Another exit agreement may provide that if certain economic goals are not met, then the borrower will release the secured property, boats, etc. for sale to repay the loan, without the lender having to go through foreclosure. This type of agreement puts a great deal of pressure on the borrower to succeed.
Remember that lenders are in the business of lending money, make yourself and your project the type of customer the lender really wants.
Best of luck on your project.