Bunkering fuel prices have seen a 75 per cent increase in the first six months of this year, further adding to the risk concerns of lenders. Image Credit: Pixabay

The standard practice for payments in the bunkering industry is for buyers and sellers to use credit to finance fuel sales. Because sellers are expected to contribute working capital and liquidity to vessel operations, leveraging credit has become commonplace.

Rising fuel prices and turbulent economic activity have required traders to request higher credit limits. Unfortunately, most banks and traditional lenders aren’t eager to lend to smaller players. Instead, institutions prefer to play it safe by avoiding SMEs they perceive to be riskier than large sellers. Realistically, bunker sellers come in every size and have varying approaches to risk mitigation.

The challenges of obtaining necessary credit are forcing many operators to search elsewhere for financing solutions. Alternative trade finance solutions - in particular, digital trade financing solution providers - provide a core structure for small-scale funding that had been missing previously.

Bunker fuel financing

Growing at a CAGR of over 3 per cent, the bunker fuel market is predicted to reach $130 billion by 2027. Bunker price volatility, such as a 75 per cent increase in the first-half of 2022, and a gradual decline in the availability of working capital, create complexities that bunkering companies have to consider in their procurement strategies. Compared to other industries, bunkering is lagging in terms of technological advancement, making strategic decision making more difficult. Without a systemic approach for financing, procurement is almost always more expensive and time-consuming than it needs to be.

Big data for risk assessment

Big data has the potential to even the playing field when assessing bunkering financing risks. Because every company has its unique risk profile, digital trade financiers adopt a more customized approach to making lending decisions over a one-size-fits-all process.

Conventional lenders make decisions in the bunkering business based on pre-established credit lines, Know Your Customer (KYC) reports, and auditing statements. In contrast to conventional financing, digital trade finance leverages transactional data to assess the risks of a growing pool of underserved merchants. For example, digital trade financing can present a holistic view of a seller’s risk profile by analysing multiple operational data points and identifying what types of information are most helpful in determining the risks involved with any particular buyer or sellers.

Instead of making lending decisions based on just the seller’s balance-sheet, digital trade finance looks at the bigger picture of a traders’ cash flow histories.

Future of bunker financing

The analysis of big data from credit insurers and other digital risk assessment providers will become more comprehensive. These improvements will allow digital trade finance companies to continue offering balance sheet-neutral financing in the maritime fuel bunkering industry.

Understanding the actual risk of each transaction, as opposed to the perceived risk, streamlines trade workflows. Another advantage of a data-based infrastructure is that the system continually gets better at identifying what types of information are most helpful in determining the risks involved with any buyer or seller.

Digital bunkering platforms provide a central location to collect and analyse market condition data that impacts short-term price estimates. The availability of more data would make the credit decision criteria more relevant to individual business models.

As per our understanding, Modifi is the only digital trade financing firm which provides financing to the bunkering industry. By leveraging many data sources, we have a better understanding of risk for mid-sized buyers and sellers and can therefore not only vet and confirm the legitimacy of the buyer, but also insure the payment of the invoice, even if the buyer were to go bankrupt.

Buyers and sellers in the bunkering industry benefit from enhanced operational transparency and faster financing than traditional lending. In turn, this visibility serves as a fundamental building block in developing a streamlined, systematic workflow for managing trade transactions.

Data is the missing component that enables lenders to make more accurate decisions on small and mid-sized applicants. We can helps SMEs fill the financing gap and free up credit lines, creating space for scalable growth to occur.