Shipping Financing Methods and Innovative Financing Method - Essay Example

The shipping company needs to show they can provide the necessary collateral in order to finance their ventures. With the expansion of modern economics, financiers, by using financial engineering, have created many sophisticated financing methods. The source of shipping finance that is more appropriate for a particular shipping company depends upon the type of company, its capital structure, and the company’s estimated profitability for the future. Of course, shipping investments demand funds well beyond any retained earnings.

Furthermore, additional financing will be needed for the further expansion of the company. The shipping industry traditionally relied on commercial banks to finance capital needs. Shipping companies because of their ability to raise the funds needed through bank financing were not very familiar with public offerings. In the last decade with the crisis in the shipping industry, traditional sources of shipping finance have played a more streamlined role than in the past and the importance of less traditional shipping finance sources such as capital markets has increased.

This has been shown by the growing importance of public offerings and private placements for the purposes of raising primarily equity and debt funds in the capital markets over the second part of the 1980s and the early 1990s. The availability of debt finance has proved successful in prosperous markets. However, when the return on assets exceeded the cost of debt during the shipping crises of the 1970s and 1980s, the return on assets became greatly exceeded by the costs of debt, causing many difficulties with debt servicing.

Equity reduces the financial risk from the use of debt as opposed to business market risk, generating from the fluctuations in revenue and cost levels. Innovative sources of ship finance cannot only contribute to the industry equity base but also supplement debt funds from traditional sources. In traditional financing, a percentage of 80% is debt finance and the owner is responsible for the other 20%.