Navigate Commercial Maritime Financing in a Rising Rate Environment

Scott Montgomery, Commercial Banking Officer with the Peoples Bank Ballard Financial Center.

Lingering post-pandemic challenges, supply chain issues, and pent-up demand has led to rising prices, resulting in a level of inflation not seen in 40 years. It seemed inflation might slow by the end of the summer with a drop in fuel prices. Unfortunately, the government’s September report on the Consumer Price Index showed inflation to be persistent.

The Federal Reserve’s response has been a series of interest rate hikes in an attempt to cool this inflationary trend. In turn, borrowers are seeing rates increase on everything from business loans to home mortgages. Increasing rates mean higher loan payments.

In this economy, it’s not surprising to feel concerned as the costs of borrowing rise. Many commercial maritime projects are financed. Whether buying new permits or planning vessel upgrades, loan costs are certainly going to be a consideration. However, today’s rising rates should not change the feasibility of a project if you have a sound financial plan.

Manage Costs

Coming out of the pandemic, several price factors abruptly hit the commercial fishing industry. Costs increased for moorage, fuel, and materials. Some costs were aggravated by global events; fuel prices soared after the Russian invasion of Ukraine in late February, for example. Other prices rose as a result of supply chain issues during the pandemic.

What we saw in the commercial maritime industry is an example of what is happening across many sectors – housing, energy, retail, and transportation, just to name a few. Given this, it was expected that the Federal Reserve would raise interest rates in an attempt to slow inflation. Not only is inflation problematic for the economy, but no one wants to pay more for less.

When the Federal Reserve raises interest rates, it results in a rising rate environment where loan costs increase. However, if you currently have a loan or are considering financing, it’s not time to panic. Loan costs will increase but should not necessarily be the main factor when thinking about managing current payments or financing a new project. In reality, a 2% rise in interest rates is not as significant when coming off historically low rates. In fact, fish prices and variable expenses like fuel can have a bigger impact on your finances.

What is most important is to come up with a plan to avoid missing potential opportunities. Trying to time permit and quota purchases or vessel upgrades to the lowest of interest rates, for example, may not be the best approach. A sound financial plan not only helps you take advantage of opportunities as they arise but also weather any surprises along the way.

Seek Financing Guidance

Planning large shipyard projects for vessel upgrades or new construction and purchasing new vessels or quotas/permits are all big decisions. Talking early on with your banker can assist with your financial planning.

Identify New Revenue Opportunities. Are you considering expanding the income potential for a vessel? Certain boats are suitable for multiple fisheries. Income diversification is possible with different gear or modifications depending on the fishery and season. You might participate in a new fishery or increase capacity within a current one by purchasing or leasing additional fishing rights. Working with a banker who understands buying opportunities and can assist with permits and quota financing is highly beneficial.

Build, Buy, or Upgrade. Are you deciding between building a new boat or doing an upgrade? Certainly, a new vessel comes at a higher cost than buying a used vessel and improving it to where you want, but it’s also completed in new condition. Vessel upgrade projects, such as large refits and sponsons, are complex and require a knowledgeable maritime banker who can also work with the shipyards. Planning for contingency funds to cover unforeseen expenses or cost increases is critical. Whether a new boat or an upgrade, you’ll want a plan to make it financially feasible.

Have a Debt Plan. Utilizing debt responsibly can assist commercial fishermen with both income diversification and growth, especially for those who don’t have years of saved cash reserves to undertake a big shipyard project out of pocket. When rates are rising, it may be challenging to think about those higher loan payments even when presented with a promising opportunity. Loan structures with longer amortizations and no prepayment penalties allow the flexibility to make additional payments in strong fishing years.

Rising interest rates can be offset with an additional down payment or other income; the important thing is to focus on how you’re going to manage expenses with the nature of changing fish prices.

Plan in Advance

It’s always a good idea to have a plan for your business that spans the next one to three years. A banker can work with you or your accountant to develop a realistic cash flow budget. If you have an estimated budget for the year, discussions about major upcoming boat projects or reviewing potential quota and permit additions can then be incorporated into future financing needs. You’ll likely make adjustments and may even shift your plan allowing you to map out what you think your expenses will be and if you need to make plans for a preseason shipyard project or obtaining additional fishing rights. Having a three-year plan is best practice, while also remembering that things can change.

Depending on your project, your plan may include some downtime when you’re not fishing due to your boat having extended shipyard time. You might need to sell a boat to get into the next larger one. Every situation is slightly different. Planning for a cash flow change is essential at the beginning, not once you’re in the middle of it.

For example, undergoing an ownership change may impact the upgrade schedule for current vessels or acquisition of new fishing rights. Mapping out a plan that includes current debt payments and possible increases will help prioritize the list of upcoming projects and potential quota/permit additions based on what is necessary and what would be nice to have should a buying opportunity arise.

Having a relationship with a banker who is knowledgeable about the commercial fishing industry can help set you up for success on projects that require financing and can help you take advantage of opportunities when they arise.

With a sound financial plan, the impact of current interest rates on loan costs should not expect to move commercial fishing income as much as a large movement in fish or fuel prices might. Working with your banker to better understand your cash flow and identify potential opportunities will not only help you withstand rising interest rates but also navigate any unforeseen expenses in this volatile economic environment.  

Scott Montgomery is a Commercial Banking Officer with the Peoples Bank Ballard Financial Center, where he serves the financing needs of West Coast fisheries. A member of the Northwest Fisheries Association and the Norwegian Commercial Club, Scott has led numerous boat, quota and shipyard financing projects. He can be reached at