Bank Loan to Shipping Corporation Essay

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2.0.2 Interest on loan

Before any loan is granted, the borrower must clarify the position as to the payment of interest on the loan draw-downs during construction. The mode of payment of this interest may vary and may be payable every six months from the date of the first drawdown with a final payment in respect of the pre-delivery draw-downs on the day of delivery, this is the standard pattern for years. It is a usual tendency to allow the 'roll up' of the interest and added to the total loan outstanding when the vessel is delivered, this leads to a substantial reduction on the cash sums that the owner has to pay prior to the vessel entering service. As an alternative to the owner drawing down the favorable loan to help make his payments during construction, in some countries the yard itself arranges to borrow the equivalent funds and pay the interest thereon, in such cases the contract price is increased to take this into account.

The interest rates applied by the banks to the shipping corporation depend on the base rates of the banks. When the base rate for the bank is used the rate payable by the borrower will change as the base rate changes.

2.0.3 Amount of loan

When a bank wants to grant a loan to a shipping corporation it must find out the cost of the vessel to be acquired using the loan. This is important since the bank cannot grant a loan that will completely cover the cost of the vessel. The most common rule is that the bank loan should finance 80% of the contract price while the owner pays for the remaining 20%. The bank loan will also not be used to finance the initial stages of the contract, therefore before a loan is granted the borrower must prove to the bank that he can meet the required cost and also cover the initial costs.

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Apart from the cost of the project, the bank must also ascertain that the loan will be engaged in a useful project, that is what purpose the loan should serve, one that will not lead to loss of funds so that if it is meant to acquire a new vessel the vessel must be good enough to start bringing income which will enable the owner to repay the loan.

In general there are essential factors that a bank considers before granting a loan to a shipping corporation, these include the amount of loan required which must be available with the bank after considering all control factors. The period of loan from delivery is also important and of course the rate of interest to be charged must be considered. It is also important to note the repayment details such as the intervals and the manner in which the interest is calculated. Other factors that may not be so critical but are significant are the details of fees and charges payable by the owner in connection with the loan, and the currency of the loan.

3.0 Conclusion

Even though some of the considerations that banks put before granting a loan are a bit unfriendly to the borrowers, they are not targeted to exclusively serve the interest of the lender but also of the borrower. It is therefore important that borrowers work very hard to meet the set conditions rather than try to bring down some of these conditions. Failure to pay loans by a borrower can lead to loss both on the side of the lender and on the side of the borrower. A shipping corporation being a business that is highly capital….....

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