Trade credit is often extended by carriers (for example: operators such as Hamburg Sud, where I worked for a spell) to regular or high-volume/-value customers. For firms who require frequent shipping, credit provision is one benefit of holding managed accounts with the carrier (other benefits are customer service-related). When cash-flow constraints limit the availability of funds, credit facilitates business continuity. When the restraint is lifted (when the funds from a major sale are received, for example), the firm can then repay the credit extended by the borrower. In the case of shipping, firms may experience demand spikes. To meet their orders, firms might have to increase capacity. Any expansion of plant will come at high cost. If overseas orders are particularly voluminous and sudden, the transportation budget that normally covers shipping costs quite adequately will probably be insufficient. To deliver however, the firm will need to ship. Offering favourable credit terms provides firms with much needed flexibility. Carriers who can extend trade credit are especially attractive to small and medium-sized export-oriented manufacturers. The normative assumption is that the customer will repay the carrier when financial stability is re-established.

Normally, credit obtained directly from the shipper is simpler to obtain and cheaper to service than credit obtained from a third party, such as a bank. Trade credit rarely inflicts the interest rates and penalties that characterise bank loans. For the carrier too, trade credit is beneficial: provision of trade credit also allows vessels to sail with an economically rational quantity of cargo. ...continue reading →

International Trade is a risk-prone activity. Transportation related risk is largely external to the firm. That is, transportation is more likely to be interrupted and cargo lost due to factors outside the control of either the selling or buying party. Cargo loss can result from illicit human intervention (crime or terrorism), accidents (crashes, derailments, shipwreck), political incidents (trade embargo or trade war), administrative error (placing of cargo on the wrong vessel), and so on. Such events will incur losses for both the buying and the selling companies. The buyer will be without the product or materials required to continue production or business. The seller may lose the payment from the disappointed buyer. Either or both parties may have to bear the costs of recovering the goods and rearranging onward or return shipment. ...continue reading →