Chartering can enhance your flexibility

By Ronnie Evans

Ronnie Evans is Director of Marine Finance at Key Equipment Finance. He has more than 20 years of experience in the finance industry. He can be reached at ronald_evans@key.com.

If your business is like most in the marine industry, the vessels in your fleet may make up one of your largest expenses. Having the flexibility to downsize your fleet in a weak economy and respond to growth faster in a strong economy can help lessen your risk and maximize your returns. There are sure to be times when flexibility can go a long way – perhaps to help meet the demands of a specific contract, or to hedge your bets during an uncertain economy.

Whether chartering from a bank, finance company or independent chartering company, the benefits can be the same. Chartering is an increasingly popular way for marine transportation companies to supplement their fleets while keeping capital equipment costs down.

Advantages of chartering include:

  • Increased flexibility. Often, flexibility is the single biggest benefit of chartering a vessel. Chartering is an appealing option for any company that needs to be able to ramp up or down to meet demand. Examples include companies moving materials for a short-term contract – such as a construction project – or those moving materials like grain or oil, where volumes can fluctuate significantly over the course of a few years.
  • Risk management. Chartering helps all companies protect against risk related to the macroeconomic environment. Because charter agreements are typically short term, the company using the vessel isn’t stuck with the expense and overhead of owning a vessel through a prolonged economic downturn. 
  • Tax optimization. In most cases, charter payments can be treated as an expense on the income statement, thus allowing your company to deduct the full cost of the payments from income, thereby reducing the net cost of the vessel. Chartering may also help you strategically manage your tax situation by passing on the tax benefits to the charterer, which in-turn reduces the interest rate and lowers your net cost further.
  • Expense management. In some cases, companies moving materials for a specific project can match their monthly charter expense with the expected revenue and length of a project.
  • Lowered debt. Because up-front costs are low, most companies are able to cover the cost of chartering without dipping into current lines of credit.
  • Enhanced cash flow. Typically, only the first payment is due at the outset of a charter agreement, which means you can conserve cash for investing in other parts of the business.
  • Improved balance sheet. Because a charter is not considered a long-term debt or liability, it does not appear as debt on your financial statement and makes the company more attractive to traditional lenders when credit is needed.

Even if the benefits of chartering a vessel are clear, you may still be asking yourself if chartering makes sense for your business. In general, any company that can benefit from more flexibility in its fleet may want to consider a charter. This is a particularly compelling option for companies operating within industries that tend to experience greater market fluctuations, such as oil and gas, agriculture, construction, steel, and others with a need to respond to varying capacities.

 

 

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