What’s the problem with financing?
The problem lies in banks’ general lack of enthusiasm for loaning money to “anyone who really needs it to buy an aircraft,” Jeff Wieand writes for the Business Jet Traveler. Wieand notes that banks are performing stricter due diligence, taking a harder look at the aircraft while stretching out the loan-approval process to about eight weeks.
Although most lenders are making credit-based rather than asset-based aircraft loans, they still want an appropriate asset value in case they get stuck with repossessed and off-lease aircraft with depressed values, Wieand reports.
Borrowers considering cash, leasing
But it’s not just the banks holding the market back, Wieand says. Although financing costs are low, so are investment returns. Thus, many buyers who would otherwise finance an aircraft purchase are paying cash, according to Wieand. Some do so because they’re buying an older aircraft, and many banks have official cutoffs for providing debt financing for aircraft more than 20 or even 15 years old.
The alternative to paying cash or borrowing to buy an aircraft is a lease. A lease offers several benefits:
- A lessor takes tax depreciation, which is passed along to a lessee via low payments and lower implicit interest rates.
- In most states, sales tax is paid over the stream of the low monthly payments in lieu of the up-front acquisition cost, yielding a much lower sales tax liability.
- Custom leasing provides flexibility for upgrade and/or early buyout options.
- True operating leases qualify for off-balance-sheet accounting treatment, providing shareholder sensitivity benefits.
- Leases provide 100 percent financing in most cases.
- Experienced corporate aircraft lessors take aggressive residuals that yield residual value protection to a lessee, which has provided significant value to lessees with diminishing aircraft values.
What does loan financing require?
If your company stands at the threshold of truly taking off but needs the boost of a private jet to do so, know that loan financing for the purchase of private aircraft is similar to a mortgage or automobile loan.
A basic transaction for a small personal or corporate aircraft may proceed like this:
- Borrowers provide basic information about themselves and their prospective aircraft to the lender.
- The lender performs an appraisal of the aircraft’s value.
- The lender performs a title search based on the aircraft’s registration number to confirm no liens or title defects are present. In many cases, a title insurance policy is procured to protect against any undetected defects in title.
- The lender then prepares documentation for the transaction:
- A security agreement
- A promissory note
- In some cases, surety from a third party
- At closing, the loan documentation is executed and funds and title are transferred.
A lender’s resources and costs required to finance a small aircraft and a large aircraft are virtually the same. Therefore, large aircraft should garner more favorable rates as a lender has the opportunity to recoup its costs over a larger dollar volume borrowed. Generally, however, the other provisions of the financing (e.g., advance amount, note term, amortization) will be somewhat consistent for both small and large aircraft.
Both floating and fixed rates are available, and often lenders offer hybrid rate structures. The best interest rate structure for you should be determined by the interest rate climate at your time of closing and how long you plan to own/lease the aircraft. Your aviation lender should be able to offer you insight into the interest rate structure best suited to your specific transaction.
Regardless of how you decide to finance your purchase, count on the experience of a professional aircraft broker to guide you through the entire purchasing process.