Purchasing a private aircraft differs vastly from other big-ticket-item transactions you’ve likely completed, and the differences may surprise you. First, for some context, we’ll discuss private aircraft financing, covering piston singles through light jets—aircraft mostly flown/ operated by the owner.
The private aircraft loan process is best described as a hybrid between buying a car and a house. Aircraft lenders will examine some of the same criteria as a home mortgage lender, including credit and income, but the analysis is generally performed much more quickly than a home mortgage. Depending on the size of it, an aircraft loan can be approved within a week or two and close as quickly as a few days thereafter.
If you're not already a subscriber, what are you waiting for? Subscribe today to get the issue as soon as it is released in either Print or Digital formats.
Subscribe Now
There are always exceptions, and the type of aircraft being financed may impact how the loan application process flows. A buyer may find different lenders that specialize in specific categories of aircraft and loan sizes. For example, some lenders focus on light aircraft or owner-flown pistons, while some concentrate on large cabin intercontinental corporate aircraft. While industry outsiders may think that airplanes are airplanes, there is a world of difference between financing a Van’s experimental RV7A versus a Gulfstream GIVSP.
- READ MORE: Equipment to Buy when Purchasing an Airplane
For private buyers, some of the airplanes that may be unique to finance include experimental aircraft (homebuilt or modified), vintage aircraft or warbirds, and highly modified aircraft such as turbine-converted Bonanzas or Malibus. It can take some digging to find a lender for these segments, but here again, some lenders specialize in those niches because they understand the products. It is important to note that specialty lenders will often need to find an independent source to help value the aircraft, which may add time and complexity to the transaction.
The Market
While loan terms may vary based on the loan amount and utilization, loan rates also vary based on the amount and utilization but are also impacted by down payment, term/amortization, and overall risk profile. A savvy shopper may also want to ask about shorter-term rates versus traditional long-term rates, especially when short-term rates are lower, as is more typical historically. Short-term rates, such as those impacted by actions of the Federal Reserve, don’t impact the bulk of programs available for private aircraft buyers, as private aircraft financing is typically long-term
in nature.
The COVID-19 pandemic created a dramatic increase in demand for aircraft lending as more people turned to private aviation as a travel alternative to commercial airlines. Consequently, industrywide, aircraft lending activity surged, and the demand for aircraft loans is only now starting to ease. While many lenders are hoping the loan activity experienced in 2021-22 will continue, the market appears to be reverting to pre-COVID levels (normal?).
When we eventually head into a cooler economic environment, banks that first entered the aviation finance space as a growth market (during and post-pandemic) may soon face their first portfolio test. As the economy ebbs and flows, managing an increase in defaults may correlate to tightening of credit policies and changes in risk appetite. Lenders that have experienced similar economic cycles in the past are likely to be better positioned against rising default rates. Prudent credit and collateral policies, absorbed within a seasoned portfolio of aircraft loans, will aid those lenders facing a softer economy. That said, the availability of capital in our segment today is healthy and exceeds demand.
The Lender
There are many considerations that go into evaluating an aircraft loan, combined with varying levels of aviation industry lending expertise and appetite to finance. Consequently, a buyer is well served to do their homework, especially with their first airplane purchase.
When comparing an aircraft finance company to a local bank or a company’s existing banking relationship, an aircraft-specific lender will secure their lien against the aircraft, without cross-collateralizing against other assets. This is key because it preserves the buyer’s local or business banking relationship for new debt for the aircraft buyer should the need arise (i.e. maintains capital availability if the company needs funding for a project or expansion). Also, nonaircraft lenders typically offer maximum terms of five to seven years, which may lead to having to refinance if the buyer still owns the airplane.
Traditional aircraft-specific lenders, those dedicated to aviation financing exclusively, like FLYING Finance, understand the market and provide terms that withstand the test of fluctuations in the economy. Such lenders also know how to file and release their interest in the aircraft, and more importantly, they trust the process established by third-party aviation escrow companies and aviation legal groups used for transferring the assets between parties and filing/releasing interests. Understanding and interpreting a title search is even more important with older aircraft and those with existing liens, as a clouded title can impact an owner’s eventual sale of
the airplane.
When searching for the best lender, here are 10 considerations and questions that may help you compare and contrast:
How far in advance of the purchase can you lock in the credit approval and an interest rate? This can give you peace of mind while you search for the perfect aircraft and complete the pre-buy inspection, but it can also protect you in a rising rate environment.
Ask about closing fees and any/all other fees that might be expected at the time of closing so you can be prepared. Closing fees can include, but may not be limited to, outside attorneys, document preparation, state filing fees (doc stamps, UCC filings), “points” or origination fees, and more.
Understand the loan term (versus amortization) and determine if there is a balloon payment or rate adjustment. If there is a rate adjustment, what underlying rate is it indexed to, and when does it adjust?
Ask if there are any prepayment fees or penalties should you decide to pay off the loan (in part or in full) before the end of the term. Are there conditions under which these fees are waived?
Determine if there are any recurring aircraft reporting requirements, such as annual utilization reporting (i.e. hours flown), or maintenance status reporting.
Are there loan-to-value covenants that require a principal reduction if the market value of the aircraft drops? For example, if you finance 80 percent of the purchase and a year later the value has dropped 30 percent, does the lender require you to pay down the loan to get back to 80 percent?
Will you need to provide an electronic copy of the logbooks, proof of maintenance history or condition, or pre-buy inspection results before the loan can be approved or closed?
- READ MORE: Why Financing Your Next Aircraft Makes Sense
Understand if there are any recurring financial reporting requirements (i.e. providing tax returns each year). Are there credit scores, cash flow, or other financial covenants that need to be met annually?
Are there any insurance requirements like minimum deductible or liability limits?
Get an estimated turnaround time for the loan approval and closing. Does the lender have any specific needs for closings (i.e. a specific attorney or escrow company to manage the document
filings)?
The Loan
As mentioned earlier, many factors affect the terms and conditions of a loan, including but not limited to, the category of aircraft, aircraft age, maintenance history (including all logbooks), damage history, utilization, credit risk, and more. The down payment requirement may be impacted by the age of the aircraft—a 50-year-old Cessna with 10,000 hours may be different from a late-model Cirrus with 600 hours or a new Baron. The term of the loan and the intended utilization of the aircraft also affect down payment and rates. For higher-use aircraft, such as those operated in a flight school or for hire, the down payment typically increases and the term shortens as appropriate to offset the higher wear and tear.
Lenders will want to examine the usual and customary data like cash flow streams as the source for repayment, so expect to provide two to three years of tax returns, a personal financial statement, bank statements, and current year income verification (i.e. pay stub). Loans for aircraft being purchased for business use or business owners will also involve an evaluation of the business’ financial performance and trends. Business owners can expect to provide business tax returns, business financial statements, and/or CPA-prepared financial statements. It is also common with private aircraft ownership that both the business and the owner be a part of/behind the aircraft loan.
Partnerships
Since aircraft can be underutilized assets and big-ticket items to purchase, forming a partnership with other interested parties is one approach that puts the dream of aircraft ownership within reach of many more pilots. Some aviation industry lenders are familiar with the partnership process and will consider financing the partnership, but typically with a limited number of partners. Partnerships are often fluid, so the members should strongly consider the structure and eventual exit strategy as partners wish to exit the group.
However, the structure of the loan application process from the lender’s perspective is the same as it is for a sole owner, meaning that the lender will not divide the loan into multiple sums whose total value is that of the aircraft financed. Each partner who is not paying cash for their portion will need to be able to stand behind the loan (credit scores and otherwise) and will be obligated for the full loan amount. The lender is ultimately looking to be assured that the insolvency of any one partner will not result in a default on the loan.
Leaseback
Purchasing an aircraft with the intent of leasing it to a flight school, charter operation, or back to the OEM as a demonstrator is another way to have an underutilized asset generate revenue and help fund the purchase. If this is a consideration, make certain the lender is aware of this before closing, as some lenders limit the aircraft utilization in the loan documents. This means that if commercial use was not authorized at the time of closing, the loan may be subject to modification or refinancing, or the lender may need to authorize the change in the type of utilization.
Given the additional wear and tear of a flight training environment, lenders will often look to amend the terms to stay ahead of the potentially accelerated depreciation of the aircraft. It is important to note that commercial use is typically defined by lenders as any time the aircraft is for hire, whether it is Part 135, Part 91, or otherwise (this may differ from the FAA definition).
In Conclusion
There is considerable nuance and opportunity in financing your dream aircraft. The information presented is intended to help buyers understand what to expect, but more importantly, raise awareness that not all lenders are created equal. Your personal banker may be a good friend and long-term supporter of your business but may not have the aviation expertise needed to guide you through the process as seamlessly as a lender who does one thing proficiently—finance aircraft.
The best aviation lenders will know the best finance options for your situation, recognize the right questions to ask about the collateral, and will likely direct you to other resources like title and escrow, legal counsel, insurance, and aviation tax advisers to help make the purchase process seamless. Do yourself a favor and invest the same level of due diligence in finding the right support services as you do in locating the right aircraft.
This feature first appeared in the March Issue 956 of the FLYING print edition.
