When it comes to many factors in the modern-day, nothing gets done well without an assessment of risk. In the shipping market especially, there is a definite risk assessment—more specifically, an assessment of credit risks.
Risk management, while it accounts for your credit, is nothing out of the ordinary in different businesses, specifically when it's something like shipping companies.
It's not just about reducing risk. It's about taking it, too. It's not so much about defense but more about offense in order for shipping companies to survive.
Especially when deciding whether to finance or not, nerves about credit risk could and should come up. Even in something much older than the modern vehicle, like a shipping company.
If you've ever wondered about the credit risks associated with commercial shipping companies, we're here to show what they are and why, ultimately, you shouldn't worry.
What Exactly Are Credit Risks?
This is mostly defined as the possible loss of something happening to an individual because of another's failure to meet the terms of a deal or make required payments.
This can come in the form of either postponing or otherwise leaving their dealings incomplete and unable to move forward, thereby breaking a contractual obligation in the process.
So, most of the time, before entering this kind of agreement, firms will evaluate the possible party for their capacity to fulfill their deals. They suss out if their reputation proceeds them in terms of trustworthiness.
Moving forward, we're going to discuss the source and cause of credit risk in shipping and the different types of credit risk thereof.
Default Risk
Default credit risk is commonly known as the possibility or chance that a company or individual will be unable to make required payments, usually on a debt obligation or redemption values of a bond.
Lenders (or in this case, investors) are almost always exposed to this type of risk in any given business deal. Default means that there is a chance that the obligation will fall through.
At times, default risk can change due to outside factors, such as a flailing economy, or more often than not, a change in the financial health of a company.
The kicker here is that although the high is concerning, higher risk can lead to a higher return and end in a higher interest rate.
Downgrade Risk
This is exactly as it sounds, as downgrade risk means a financial loss to an individual due to another's down sliding credit status.
This term usually refers to when a specific security is triggered by a piece of qualitative and quantitative information. And that can lead to a decrease in the financial valuation of that security.
A downgrade can happen to a stock because of the deteriorating fundamentals of the company or the changing favor of the current marketplace or macro-environment.
Although a downgrade may lead to a decrease in contract value, it usually does not, however, lead to a default—thereby undercutting some of the risks involved in investing and when downgrading occurs.
Credit Spread Risk
The credit spread of a bond is when an investor who has purchased a longer-term bond is locked into one that pays too little.
Changes in credit spread and credit-risk spread might result in financial losses. However, that does not usually mean that there will be a resulting default.
Credit risk spread sometimes depends on the strength of the current economy. In a stronger economy, credit risk spread is more important, as the chance of bankruptcy is lower in such an economy.
Bond interests usually are on the rise during stronger economies, hulling more interest in investment overall.
Essentially, depending on the economy, getting locked into a poorly paying investment can be either a greater or lesser concern.
Credit Risk in Shipping Companies
Its' really no surprise that shipping is a pretty risky business, as there is exposure to freight payment and price fluctuations. This creates a possibility that agents might not be able to meet their contractual obligations.
Credit risk in shipping can be viewed from many different perspectives—whether it's from the financier, an investor, a supplier, or even a derivative trader.
Regardless, the endpoint is much the same: for the most part, without risk, there is no reward.
That taking a chance on an investment like shipping can result in a larger payoff in the future. Because even as the world continues to change, there could always be a need for helping those across the world with their cargo.
Easier Payment Assistance
Nowadays, a customizable payment program can help the average freight broker schedule quick pay options in real-time.
These programs, like Comfrieght's Haul Pay, can help check customer credit and receive advanced payments for peace of mind and security, eliminating your credit risk now and in the future.
With consistent one-day payments, the minute you press that bottom on your invoice to request your payment, it's automatically yours. No worrying about waiting for your money or driving to your bank.
And with real-time updates, you're immediately kept in the loop with your payment status or any important changes that occur.
Just Around the Corner
Here at ComFreight, all we wanna do is help in making your journey and your business solid, and in doing so, make your life easier, too.
Trust, problem-solving, respect, and passion for our customers are embedded in our DNA. And we hope that as the freight industry continues to grow and change, you continue coming to us to help you.
Our growing team is always on call to help you in any way you need when it comes to your business needs.
Contact Us
We hope that learning about different credit risks has been interesting for you and that you come by soon.
Whether it's to answer questions about the freight industry or to provide tech solutions business-wise, we're here for you.
Our team is eager to settle any problems you may have. And making it optimal for your side of things to thrive is just as important as doing so on our side.
So, please, if you would like to ask any questions or find out more about Haul Pay, contact us here. See you soon!
