With cruise lines in a cash flow crunch, they've changed the credit term to an extent that may be untenable, especially for smaller vendors — micro, small and medium enterprises (MSME) — that comprise an estimated 70% of cruise ship suppliers.
'Many suppliers are out of cash'
'Many suppliers are out of cash, after loss of revenue in the past 15 months,' said John Paul Brigneti of Miami-based JPB Global Trade Solutions, who has 40 years of experience in purchasing and logistics. 'Prices for everything are up.'
Brigneti recently got a $23,000 quote for one dry container from China to Florida, which would have cost, at most, $4,500 pre-pandemic.
'It's absurd, totally insane,' he said. 'The freight forwarder has to have enough cash to pay the ocean carriers and with an extension of the credit term by their customers they will always be operating with a negative cash flow. Today just to ship 50 to 60 containers a month from Asia to Miami is costing a million dollars a month.'
It's also taking a long time for containers to arrive due to lack of space on board and booking delays. Already over the summer, US retailers were sounding the alarm on getting containers from Asia in time for Christmas.
Credit term extended
According to Brigneti, instead of paying invoices in 30 days, top buyers in the cruise industry are extending the credit term to 45 to 75 days, sometimes as long as 90 days.
'It's a very big problem. Ninety days to get paid is impossible for an MSME to stay in business for much longer with an average cash cycle of 120-plus days. There are going to be a lot of suppliers that cannot make it ... They may be managing now because we are not yet at full provisioning cycle but this could be a major issue in the next 12 months for the restart of the cruise industry at full speed,' he warned.
Drydocks impacted, too
Drydocks are impacted, too, at a time when many ships need work before resuming service. With the new extended credit term, Brigneti said, contractors may not have enough working capital to support the drydock operation, to pay for materials and labor.
Reverse factoring solution
To surmount these issues, Brigneti believes in a supply chain finance solution called reverse factoring — a supplier finance program that buyers like cruise lines can use to offer early invoice payment on their payable account from a third party (bank or other finance provider) to their suppliers based on approved invoices.
The program is initiated by the buyer so the interest is based on the buyer’s credit rating instead of the supplier’s, which typically results in a lower financing cost for the suppliers. 'The positive point is that the MSME, anywhere in the world, do not have to go to local bank to try to open a line of credit with very low chance to get approval after more than one year of substantial revenue reduction and, as a result, fail to deliver the order,' he said.
Working capital optimized for buyer and seller
Brigneti, who has detailed his concerns and explained how reverse factoring can address them in a LinkedIn post, said it will take a cultural change on the part of purchasing departments to consider reverse factoring. But he believes something needs to happen to avoid 'sinking the seller.' Plus, he said, reverse factoring optimizes working capital for both parties: the buyer extends the credit term, and the seller reduces day sales outstanding.
One major cruise line started using reverse factoring two years ago and plans to continue as operations resume.
Brigneti is scheduled to moderate a Seatrade Cruise Global session, 'Alternative Financing Solutions to Start and Grow Business,' on the morning of Sept. 29.