How do I finance buying a boat for charter?


How does financing a boat in the charter ownership market work?

Charter ownership and programs offered with shared boating, takes advantage of the strong demand in the tourism industry.

It also enables new ways of financing a boat purchase and attracts new sailing enthusiast and holidaymakers with the hassle-free terms for the boat owner.

So a boat ownership in charter may be a good way of getting that dream boat of yours! It has also proven for many to be the solution for speeding up the purchase/financing and removing the cost for up-keep of traditional boat ownership.

Viktor giving advice on boat financing

It has never been a better time to consider a new charter boat. This because of the overwhelming demand for new boats and the lack of inventory available on the market.

But there are still questions to be raised and dimensions of options that you need to be aware of. So it pays off to talk to an expert before you go into your local banking branch and hope for the best. 

Whether you are new to yacht charter ownership or a seasoned investor, our goal is to give you a comprehensive overview of the possibilities in the charter management market.

You will become informed and empowered, while having the freedom to choose.

Terminology & Definitions

So, we assume you want to compare the market and find the best boat charter investment financing solution for you. Keep on reading this article to perhaps shed new light on what you already know and thought you knew about boat loans in charter and leasing for charter boats.

But first, let’s start with the terminology and understanding what all definitions really mean. And also how they are played out in the different charter management programs and ownership programs.

Full Financing Investment

Definition: Full Financing of a purchase or investment in a boat with a charter management or in charter ownership (with or without program) refers to the means where you, the buyer, pays the full asking purchase price of the yacht or charter investment program.

In addition, this requires you to arrange your own boat financing with your local bank, financial service firms and /or credit union.

It will also entitle you to the charter income produced by your charter management agreement or ownership (program) and other ownership benefits defined by the charter business you have contracted.

Associated Charter Programs: Charter Ownership/ Complete/ Performance Programs/ Investment Programs/ Guaranteed Income Programs

Part Financing Investment

Definition: Part Financing of a purchase or investment in a boat with a charter management or in charter ownership (with or without a program) refers to the means where you, the buyer, pays PART of the asking purchase price of the yacht.

The buyer then receives ownership benefits as defined by the charter ownership, and/or your ownership rights, benefits and options defined by the charter management during the financing period.

Associated Charter Programs: Charter Management/ Leasing/ Partner/ Balloon Payment/ 35%-55% Down payments

Charter Ownership & Charter Management Programs

Is there a difference?

The definitions are most often used in the industry by professionals and the boat owners themselves. (as an umbrella term for the boat being used for commercial purposes.) However, for the sake of determining when, why, and whom, the different terms apply to, we will make a separation between them both:

Charter Ownership refers to the contract or agreement made between the the customer with a charter business and/or operator (the Service Provider).

It’s usually the Service Provider that is offering a Charter Ownership Program/Investment, with detailed and pre-made conditions for the Customer.

In fact, the charter management programs are most often defined as a loan agreement. The customer will receive several options of boats, destination and contractual periods.

The investment or loan by the customer, is most often covered by a mortgage. It lean to the full right of the boat in the program. The service provider is paying back the ownership of the yacht at the end of the contract period. Want to find out more?

Check out our blog on the same topic: How To Choose The Right Yacht Charter Ownership Program

During the agreement you will receive Charter Ownership benefits in terms of:

  • Maintenance
  • The up-keep
  • Mooring (berth)
  • Defined sailing usage (usually points or the equivalent)

The charter management refers to the agreement made between the boat owner and a professional charter business/yacht management operator.

Usually the operator is offering a standard or customised Management Agreement, with a detailed description of the services offered by the Operator during the contractual period.

Due to the tailored nature of many Charter Management Programs, there is an extremely wide variation in terms. So the biggest areas to consider are Charter Operations & Maintenances Support.

Who is responsible for what activities eg cleaning before and after a charter, handovers, fixing minor faults, replacing lost items and consumables as well as arranging and paying for regular maintenance.

Do you want to read more about Yacht Charter Management Programs? Read our comparison of the different options available here!

Services most commonly offered in Charter Management Programs are:

  • Agency service (the full service of renting out the boat)
  • Mooring (berth)
  • Ongoing maintenance
  • Winter services
  • Insurances
  • Licenses and registration for commercial purposes.

Boat Leasing:

Operation & Financial

For you to make a decision on what financing you will choose and whether you do the financing on your own, or like to enter a Charter Ownership Program or Charter Management offered by a charter business.

Maybe you like to receive the help of an industry professional to receive the best fit for your needs. Then you need to know the difference between the TWO PARALLEL LEASING options (part financing) offered in the charter market.

Operational Leasing

Operational leasing is offered by most of the bigger charter businesses. It refers to the loan structure and financing of the charter business. The boat and a charter ownership program is offered in a Part Financing program by the charter business to you as the potential buyer.

Your loan or part-financing is with the charter business. Therefore, financing and leasing behind the charter business is often with a specialised credit institution for the leisure marine industry.

The charter business has the responsibility to follow the leasing payments and does what is necessary to meet the payment requirements and adhere to the ownership agreement with you as customer.

Financial Leasing

Offered by most independent charter businesses. Financial leasing refers to the loan structure and financing of a single credit approval (a yacht). Whereby the buyer/customer is under no scrutiny and the charter business itself is the guarantor for the validity and feasibility of the projected charter income and business plan.

The buyer is in connection with the credit institution and has also a charter management agreement with the charter business (operator) that will manage the charter and down payment of the leasing.

Limitations & Risks

What the banks have to say

Let’s move on! So what is the process of getting a boat loan? Before you run of to your local bank or known credit institution, here are few a things lenders like:

– Not surprisingly, a high net worth appeals to banks. A 2:1 net worth/debt ratio is good. Financial institutions are also looking to cross-sell their products and high net worth individuals represent opportunities for other kinds of financing including primary residence, second home, auto, RV and even a business.

– Your debt/equity ratio will be important. The lender wants to know that you’re not already overextended with other loans. (*2 )

– Also, lenders want to see that the borrower has managed loans of a similar size before and therefore won’t be overwhelmed by the current transaction. Liquidity is also important. Just getting into the loan shouldn’t eat up all the borrower’s resources. Lenders look for liquid assets that will cover 12-16 months of payments if an employment situation should change. (*2 )

Stability and consistency are key

– Steady employment, a history in the current profession, and a primary residence are factored together by a lender. This as part of the candidate evaluation process. Having other high value assets helps too as they are potential secondary sources of repayment. (*2 )

– Credit scores in the 700 and 800s are ideal. However, even scores in the 600s may be acceptable today so long as other criteria look good. (*2 )

– Having gone through the boat buying process before is a plus. Lenders know that experienced boaters understand the requirements of marine lending as well as the ongoing costs of boat ownership and are less likely to overcommit when choosing a vessel. (*2 )

(*2 )

Cashing your boat

-NOT financing a yacht with a program or finance offered by the charter company.

First, an insurance is required and must be arranged before the closing of the loan. Your broker, dealer, charter business will help out with this.

friends talking about how to finance a yacht in charter

When financing a yacht through our Yacht Ownership Program, lenders do not consider the guaranteed income that you will receive as an owner to help qualify you for the loan.

Therefore, it is a very similar process to financing a private yacht. You will not have one large payment to satisfy your loan at the end of the program.

The next cheapest form of finance is using equity from your home or restructuring your home loan to take advantage of the lower interest rates. Also longer payment terms compared to commercial leases.

Obviously, your national and local bank, or any financial service firm and credit union, will need some collateral that they are familiar with in estimating and a risk that they can handle.

Therefore, it’s not uncommon to see charter boat buyers having a combination of a property redraw facility and a dedicated boat loan. A portion of the boat is paid for via the property redraw facility and a portion funded through a chattel mortgage.

With securing finance against equity in a property, it has the added flexibility to make progress payments in the case that the boat is being built new or overseas.

What to expect

Usually, you approach a credit institutes not specialised in loans for boating. You should expect a standard 20/20/5 loan (20 year loan with a 20% down payment at 5% interest). This will be processed quickly and relatively hassle free.

However, there are exceptions to the rule! For example: Finance (United Bank) or Essex Credit (Bank of the West) for U.S citizens, which reports giving a 15 year loan with a fixed interest rate.

For European citizens, the most frequently used financing institutes for boat loans are for example:

  • SGB
  • Erste
  • UniCredit
  • PBZ
  • OTP
  • Sea Lease
  • Close Brother
  • Lombard
  • Santander bank

*These are all represented by affiliates and also have close relations with local national banks.

Every credit approval is unique. The conditions often vary from 7 years (with no or balloon payment) to 12 years. (depending on security offered by the buyer covered earlier in this article.)

If you are considering leveraging your boat loan with a chattel mortgage because your property redraw facility does not cover the full purchasing price of the yacht. You then need to be aware of the collateral value of your yacht as the lean/mortgage for the lender.

So if you like to use the boat as collateral, it could potential restrict where you can place the yacht. Because your lender needs the security in the boat and the risk is too great to have it sail in waters that they are not operating insurance and risk policy in.

How to Finance your boat together with your charter business

Operational leasing

Many of the well-known charter business offer charter ownership programs with very low opt-in. As low as 25-35% payment of the full price of the charter ready yacht on offer. Some of the programs also offers balloon payments that needs to be met by you as the owner. Meaning that you will have to pay a residual value on the loan by year X to release the ownership of the boat to you.

As mentioned before in this article: You are signing an agreement and paying the charter business that offer the ownership program. It’s their business to comply with charter ownership agreement and at the same time make sure their payments to the principal/ or credit institutions that holds the leasing (the lender) is met.

There are 3 reasons to why charter boat buyers choose part-finance charter ownership programs:

Availability from the charter industry

The boats are pre-ordered. So it’s out of the interest of the charter business to make sure they have a steady renewal of their fleet. Many of the well-known charter businesses fleets are in leasing. The charter businesses pre-ordered hundreds of yacht per year at the ship-yards to the charter market and thus are not financing the purchasing themselves.

The easy to understand concept of the programs

As they are not targeted to be the best solution for you, but again to be a solution that is best for the charter market and the charter business. It’s premises that you will receive a holiday program and the boat that you have chosen to be a part of the program by the end of the contractual period.

It’s a free holiday and boat at the end

Many of these programs are extremely appealing to the new and growing demographic of boat owners. The new owners are shy of taking on the burdens of traditional ownership and see the benefits of low-cost holiday program and the dream of getting a boat in the end. It’s per default an investment in your lifestyle. It grants you free ownership of a boat during the period. Which means no costs for upkeep and sailing during the years as the owner of the boat in charter.

Financial leasing

The same leasing terms and conditions offered in the well-known charter ownership programs. They can be found directly with the credit institutions/ banks, that could potentially offer them directly to you.

Traditionally commercial leases from the major banks would not factor in the returns from the charter boat revenue. However, for financial leasing this is not the case. As mentioned earlier in this article: The commercial projections and the business plan is defined by the charter operator you choose and approved by the lender before accepting the conditions of the leasing (year, down payment, interest rate, flag state etc).

You will be given an initial leasing quote. The leasing quote is approved by the lender. They have access to the all the necessary data and intelligence on the market, such as:

  • The price list in charter for thousands of boats.
  • The actual real time chartered bookings in any specific charter market.
  • Historic projections vs. outcome.
  • All the necessary financial information about the charter operator you choose.

By no means, is the approval of the operational nor the financial leasing any guess work by the lender. However, the loan approval of the financial leasing accounts for more securities, such as the charter feasibility study, the yacht itself (equipment level and the market value), and the economic health and business performance of your chosen operator.

Here are 3 reasons to why charter boat buyers choose the part-finance financial leasing:

1.) The low down-payment

The strength of a well-planned charter management agreement, is of course the no-cost ownership for the buyer. It’s now also a close to the norm and no longer an assumption that the yacht will bring a positive yearly result. So the credit institutions specialised in the charter industry will often offer more favourable loans than for those granted in traditional yacht ownership.

Many of the buyer’s also arguably find the low initial investment attractive. It could enable them to make more than one substantial purchase. The charter income would cover all the leasing fees and free up capital for the buyer.

2.) The non-conditional (no credit approval of the buyer)

The significant difference between financial leasing and operational leasing. Being that the operational leasing is based on a credit approval of the charter business and the subsequent loan granted to that charter company, and not the approval of a one-specific business case (a business plan for a yacht in charter management), presents options for the buyer that are not presented otherwise with a loan application at their local/national bank.

As described earlier, the buyer will not be subject to scrutiny nor the subject for the credit approval. The readiness of a leasing approval is based on the charter operator and business plan (charter feasibility study), so the client will per effect have more options to choose from, such as: yacht models, destinations and the length of the charter agreement. Finally, the origins or where the buyer’s residence has not significance on the loan approval.

3.) The years and flexibility

A financial leasing is by default more flexible. That because it’s based on a business plan of a single entity and it’s manageable by (the buyer/loan taker). Compared to an operational leasing, the latter is dependent on the overall business model of a charter company. It then limits the leasing conditions offered by that charter company to the buyer/investor as they offer standard ownership programs and need to manage risk and liability overall (many investors/yacht owners where they are responsible for the leasing payments of every single yacht).

Knowing Your Market

The conditions and financial structure in the industry are always changing. Therefore, the companies and credit institutions invested in the industry are operating out of their own interest. Their service of lenders are their business model, which limits the amount of unbiased information and advice you will receive.

The following advice and guidance are there to empower you and give you better overview of what you can expect when starting your research or deciding on what your next step is to get the yacht you want and the lifestyle investment that suits you the best.

Used boats vs. New Boats

It’s not uncommon to see used boats being purchased out of a charter fleet and taken over for private use. But the question remains if its worth it?

A very interesting vlog on the subject is seen here below:

Since over 85 percent of the boats sold in the U.S. are pre-owned, it’s good that used boats can be financed too. It is however, more complicated and often more expensive to secure a loan for a used vessel. New boat loans may be originated, processed and closed in a week, which is much faster and easier than real estate loans.

Financing for pre-owned vessels takes longer. First, used boats need a survey or appraisal, which means a haul out and other costs. Sometimes a bank will require comparables in addition to the survey to assess a fair market value and comps can be hard to find on unique/older vessels. A title examination will be needed to make sure there are no outstanding liens. Some lenders may finance a yacht that is up to 20 or 30 years old.

Understanding the Phase Out and the Residual Value

The Phase-Out refers to the maintenance and work to be undertaken for the yacht leaving an exciting charter fleet.

The Residual Value refers to the market value of the yacht or the cost of releasing the yacht from its financing at the end of the charter ownership program or leasing.

So if you are planning to pay for a part-financing charter ownership program with a balloon payment at the end of the agreement. Then you should consider what you are paying for now (equipment, the current market value of the yacht). Also how the ongoing maintenance and phase-out maintenance will affect your total investment and depreciation of the market value of your yacht.

Therefore, a key aspect in deciding, is not just what yacht you choose and where to place it for the best possible charter income scenario. But also WHO takes off your yacht and what their phase-out will include to make sure they take care of your investment.

The U.S Market and Tax Deductibles

Tax deductions are possible. As long as the vessel has a bed, a head and a galley, it qualifies as a second home. So the interest is deductible on federal tax returns. For example, borrowers can pay cash to get the vessel immediately but opt to finance later (like 3-6 months later, but not years down the line) (*2 ).

Additionally, a vessel may be put into a family trust but in this case, be sure to factor in additional costs for attorney fees. And, more borrowers put yachts into single-asset limited liability corporations so long as the boat is meant for personal use. This has some tax advantages especially when it comes time to sell.

For US customers and taxpayers looking to maximize the tax benefits of Active Ownership, section 179 of the IRS code requires ownership by the yacht investor.

Yacht Match logo - Helps you to find the best charter ownership program

How can we offer advice and at what value?

We are a consultancy company giving you a better overview of the options and how to become better informed. With this information, we can tailor charter management for you and use our service to receive an improved version of the traditional charter ownership programmes one comes in contact with on the market.

You assign us to represent your interest; you are our principal. We don’t work for a specific partner nor a shipyard. Our independence ensures you receive a professional advisory and unbiased consultancy service at all times.

As well as representing the interest of our prospecting clients we also collaborate with our business colleagues and partners worldwide who will play an active part in contributing to the advice and publications, resulting in a balanced view of the unfolding events.

Sounds interesting? Fill out the form and we’ll set up a meeting for you!

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