Cutting Through the Myths of Aircraft Financing
Latent memories of the Great Recession continue to feed myths and misinformation about the availability of aircraft financing and loan interest rates, notes Dave Higdon. But what are the myths, and what are the facts…?
The myths surrounding the availability and terms of aircraft financing combine to discourage some prospects from pursuing their desire to buy into Business Aviation, or change their aircraft. It’s important, then, to explore the perceived ‘truths’ of aircraft financing, and where necessary set the record straight.
Following are some of the prevailing myths in Business Aviation at this time...
Myth 1: There’s Very Little Good Financing Available
Multiple lenders with credible reputations for fair dealing are servicing today's market for new and used business aircraft. These lenders span a significant variety of institutions and businesses. Today's playing field is arguably smaller, albeit more diverse than it was in 2007, however.
Today lenders range from large banks (domestic and international) to smaller institutions focusing on regional markets. Of course, they all seek to generate profit from their assets but can't make a profit off idle money... so many lend funds to airplane buyers, which (in general) tend to be good-risk borrowers.
Not all lenders offer financing suitable for every deal or airplane category.
The key to fulfilling the finance need centers on finding a fit between the chosen aircraft and the lender.
Thus, aircraft financing can be as much a matter of knowing what to seek as knowing what to avoid.
A business looking to add its first aircraft asset may need nothing more than its local bank when the aircraft is a high-performance Piston Single, older Turboprop or even an older Light jet. But a prospective operator looking to add a late-model Large Cabin jet may find better, more knowledgeable help via a lender specializing in higher-end business jets.
Myth 2: Cash is Always the Best…
The perennial conundrum in aircraft transactions: Cash or credit? In recent years many a business decided to bank profits rather than invest them – or return some to shareholders as dividend payments. Such caches of cold cash allow the holders the option of acquiring the business aircraft of their choosing without enduring the process of finding financing, completing loan applications, conducting due diligence documentation and engaging title search companies.
Cash purchasing means no loan papers, no credit check, no down-payment and no interest payments. The title check, however, remains a smart move that, if skipped, could produce complications when time comes to sell that aircraft.
According to a sampling of dealers, brokers and lenders, cash remains king and accounts for upward of 40% of all used aircraft purchases.
Leases of various types are responsible for another third of transactions, leaving between 25-30% of transactions to the lenders.
Interest rates for lending remain below historic norms, even after several small upward adjustments by the Federal Reserve in recent months. The 12-month US$ London Interbank Offered Rate (USD LIBOR) is the average interest rate at which a selection of banks in London are prepared to lend to one another in US$ with a maturity of 12 months. LIBOR rates provide a good yardstick.
The bank rates for loans on business-turbine aircraft in the US range from the low 3% range to under 5%, based on a sampling of multiple institutions. Take a look at homes and automobile loans and you'll see similar rates for “well qualified” customers.
The lowest rates go to new and newer used aircraft – but only for those well-qualified buyers able to make a minimum down-payment of 20%. The lowest interest rates go to buyers making higher down-payments. The planned home-base of an aircraft may impact the interest rate a lender seeks – particularly if the lender is in the US and the planned home base is in a part of the world with security issues.
Cash transactions carry lower costs - they tend to take less time, and once the deal is done, it's done. You can base the aircraft anywhere that works for you. The only issue then is between you and your insurer. But, cash reduces the tax implications with no interest payments to deduct. Any depreciation depends on whether the asset remains eligible to be written off.
Investment experts caution prospects considering a cash deal to weigh the investment value of those funds against the costs of a loan, of which interest payments are only a part.
The cash-or-credit decision will hinge on whether the buyer sees potential to earn more than the loan's cost by keeping the cash in paying investments. Where the loan costs exceed the funds' investment value, borrowing may not be the preferred approach. But where the funds can earn more remaining in investments, loan payments may be the better-value decision.
Myth 3: Financing Options are Restricted
Pre-recession lending norms returned a couple of years ago, albeit with changes. Today's market bears little resemblance to conditions approaching the used aircraft market of a decade ago. Diminution of residual values in today’s market differ from the heady days before the Great Recession, but younger used jets still command good prices. Availability is the biggest difference here.
And now people are flying more – good news helped along by innovative new options for flying private aircraft and the high-visibility downsides of airline travel. As for options for borrowing to buy an aircraft, consider these lender options:
Banks: Anyone doubting the desire of banks to participate obviously hasn't seen the advertisements populating aviation and business-oriented magazines. Banks make their profit by lending money to borrowers able to pay the principal and interest on the note. In general, all banks make loans – but not all banks lend their funds for aircraft purchases.
Some banks will lend money to fund an airplane when the borrower is a valued customer with an established relationship with the institution. Other banks have departments with staff specialized in making loans on aircraft. Each has its own set of guidelines defining the kinds of aircraft and loans they will make.
The key to deciding to do business with a bank is finding one for which the total costs meet the buyer's needs.
As noted before, interest payments are only part of the costs, but they are tax-deductible regardless of the depreciation available, provided the aircraft is related to a business purpose.
Direct Lenders: These can be a little more difficult to find, but they're out there. These sources of funding are not banks or loan companies, but they are indeed entities that lend money. In some cases, they may be individuals with liquid funds available to lend. Their interest rates may be more favorable and their overall costs in line with, or below that of a bank or other lender.
These sources have the flexibility to act where chartered institutions may not. And they're not bound by rules of banks and loan institutions. Typically, these lenders base their decision to loan more on the credit and resources of the buyer, not the asset itself.
They don't always want to encumber the aircraft, instead working with the borrower's own financial security as the basis for making the loan.
Asset-Based Financing: Referring to the use of a company's balance sheet assets, this form of financing includes short-term investments, inventory and accounts receivable, in order to borrow money. The company borrowing the funds must provide the lender with security interest in the assets, and with this approach the aircraft itself may not be encumbered.
These types of loans are an attractive option for owners who wish to refinance an aircraft to pay for improvements, upgrades or overhauls.
The assets used to secure the loan may include company inventory and raw materials used to produce new products. Interest rates may run a little higher, but the terms are often shorter and more flexible.
Lending Market Alive & Healthy...
One bank loan officer who spoke with AvBuyer noted that his institution's two biggest challenges often stem from a lack of buyers and competition from cash. Many prospects, he said, are prone to think that today's finance market remains unchanged from the dark times of 2008 and beyond.
In reality, the aircraft finance market returned to a more-balanced status several years ago – and banks have funds to lend.
As for the “cash competitor” (as he put it), competing for the business of the cash-flush buyer comes down to showing them what that cash can earn them over and above the costs of a loan. And that, he said, may be the pathway to gaining a customer on two fronts: One a depositor, the other a borrower.
So, would-be borrowers interested in an aircraft can rest assured that loan officers across the US are ready to take your call.
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