Aircraft Finance: Questions to ask Before Applying

Where aircraft financing is concerned, it is crucial for potential borrowers to plan ahead, asking the right questions before applying. Gerrard Cowan explores...

Gerrard Cowan  |  14th February 2024
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    Gerrard Cowan
    Gerrard Cowan

    Gerrard Cowan is a freelance journalist who focuses on aerospace and finance. In addition to his regular...

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    Questions to ask about aircraft finance



    There are a range of factors to coordinate for an aircraft purchase, all of which take time. This is particularly true where aircraft finance is likely to be a factor in the acquisition, and allowing the time to ask all the right questions prior to signing a financing deal is essential.

    If the process is rushed or compressed into a shorter timeframe than is standard, there are likely to be complications that will frustrate all parties involved.

    Buyers should reach out to financing contacts early in the process to find the right experts for their needs, according to Ramy Sidhom, Head of PNC Aviation Finance. “Building the best team of experts has nothing but upside for the buyer now and during the life of the aircraft.”

    The way you plan can either materially enhance the buyer experience or have a severely negative impact, he explains. “The financing simply becomes a lending arrangement if all parties are communicating and furnished with the accurate deal specifications.”

    He underscores the importance of studying the aircraft in question, determining the potential operating expenses, maintenance plans, etc. “The total determines how much money or liquidity will be needed to close on the transaction and to operate annually.”

    Timing is a factor here, too. “New contracts for most models have delivery wait times of two years or more. Does the wait time make sense, and if so, what will you do in the interim?

    “If evaluating a used aircraft, it is helpful to work with the financing team early in the process so that there are no delays in closing while the financer completes their due diligence.” Identifying the usage, registration and type of loan you are looking for upfront will ensure you are working with the right lender with the right type of financing, according to Brian Macbean, Director of Credit and Sales at AOPA Finance.

    “All lenders have different requirements. If you change one of those factors mid-process, you risk losing the financing altogether.”

    Five Key Questions to Ask when Planning Aircraft Finance

    As such, Macbean highlights five key questions to ask when planning your aircraft finance application. First, ask “what is my mission, and which airplane best fits with that mission?”

    In other words, determine exactly how the airplane will be used.

    “Identifying the needs and wants for the use of the aircraft before engaging with a lender is critical to ensure you get the right financing in place,” he explains.

    Second, consider your timeline. While financing takes time, an approval from a lender will have an expiration date. 

    Although it’s a good idea to start early, starting too early may force you to duplicate efforts if you have to renew your approval.

    “Most lenders can offer approvals valid for up to 90 days, so if your purchase is six months out, it may be best to wait on the application until you’re closer to completing the transaction,” Macbean adds.

    Third, think about registration in terms of the aircraft ownership structure. Macbean has seen many instances where a last-minute change in ownership structure delayed the closure.

    “It’s best to consult your financial and tax professionals early to determine the appropriate ownership structure for the aircraft,” he notes. “If you know the ownership structure before you apply for financing, the approval and closing processes will go much more smoothly.”

    Fourth, consider the financial information that will be necessary. Most lenders require a personal guarantee on aircraft loans, regardless of the ownership structure, Macbean says.

    They will need to see at least two years of tax returns, with all the associated forms and schedules. And if you own a business or the aircraft is owned by a business, lenders will also need at least two years of business taxes as well as current business financial statements.

    “If providing complete financial information for the last two years is not an option for you, some lenders offer a ‘low-document’ or asset-based loan product that requires less documentation, but often has different terms than a loan product with a full financial underwrite,” he shares.

    Finally, ask if you can get insurance – and how much it will cost. “Aircraft lenders require both hull and liability coverage while the loan is in place,” Macbean adds.

    “Insurance costs and pilots’ ability to obtain sufficient coverage have been challenges in recent years, so getting quotes early in the process will help confirm the viability of financing your chosen aircraft.”

    Evaluating Aircraft Finance Options? ‘Three Major Levers’

    According to Preston Holland, Chief Commercial Officer at FLYING Finance, it’s vital for prospective aircraft finance applicants to have their house in order. For example, audited financials, clean books and a low-to-reasonable level of debt will greatly impact the terms the buyer is offered.

    When this is complete, it’s important to optimize your priorities, whether cost of capital, amortization terms, or loan-to-value (LTV). These are the three major levers when evaluating finance and will each affect the monthly debt service and the terms.

    “It is usually best to consult your CFO or financial advisor to determine how to optimize your debt stack when planning for an aircraft purchase and then seeking lending sources that will optimize for your goals,” Holland says.

    If the financial picture is messy – for instance, if there is an outsized level of debt – the likelihood of approval with the desired terms will decrease. “The underwriters will want to feel confident in the ongoing concern of the business they are lending to. To do so, they need clean books,” he adds.

    Consider How Aircraft Usage Impacts Financing

    Chris Lee, Specialty Finance Group Division President, Aircraft Division at 1st Source, warns buyers that hope is not a plan.

    “Are we making sure to get pre-qualified first so we can go shopping for what we can afford, or are we making offers then hoping to get financing approval?”

    Usage is a key consideration, he says. Consider if you plan to allow for Part 135 (Charter) usage when you are not utilizing the aircraft.

    “Does it make sense to utilize charter or fractional to supplement aircraft ownership for those more extreme long- distance trips and own an aircraft that’s most efficient for the majority of our shorter-range missions, or vice versa?” he asks, adding that prospective borrowers should consider if they’re matching aircraft usage to amortization terms.

    “High utilization (hours/year) should come with shorter amortization terms to match the accelerated times on airframe and engine; lower utilization could have longer amortization as the values stay higher for longer.”

    Lee highlights a range of other areas to consider, such as whether the structure of ownership allows you to take the tax depreciation you need, as well as whether you’ve worked out the pilot, hangar and management for the aircraft.

    Lack of planning could lead to higher interest rates if lenders perceive higher risk, he warns. It could also limit your options, as you may not qualify for more favorable terms or financing from reputable lenders, or lead to unrealistic terms creating repayment challenges.

    A Solid Aircraft Finance Partner can Help Facilitate Discussions

    Hannah Davis, Vice President of Sales – Eastern US at Global Jet Capital, said it is important for finance seekers to look internally, too, before making any purchase, identifying key internal stakeholders and their unique deliverables.

    “A winning result for the aviation team isn’t necessarily going to be the same as the executive, procurement, treasury, accounting or ESG functions,” she says. “The operator needs to determine the mission profile, budget, capital, accounting and/or optics considerations, and the timeline.”

    A solid aircraft finance partner can play a key role here, she notes, helping to facilitate internal discussions needed to align key stakeholders and ensure winning conditions for all partners in the transaction.

    “We understand it's not always practical for operators to one-source their aircraft financing. Instead, we encourage transparency and recommend finding aircraft experts who can help you explore your financing options.

    “Each financier has its strengths and specialties, so it's crucial to figure out what matters most to your organization and explore options to find the right fit.”

    In Summary...

    As with anything in aviation, prior preparation will ensure a smoother experience down the road, a spokesperson for the National Aircraft Finance Association (NAFA) concludes.

    “What sort of down payment are you considering? What monthly payment are you budgeting for? Do you have your financial information readily available to submit to the finance institution for underwriting? Does the lender you’re working with specialize in aviation? And does the lender have any restrictions on particular makes/models or usage?”

    It’s important to engage specialists in different areas in tandem, the spokesperson explains, assembling an acquisition team including finance experts alongside insurance agents, and so on, to ensure the team is working together. 

    More information from:
    1st Source: www.1stsource.com
    AOPA Aviation Finance: https://finance.aopa.org/
    FLYING Finance: https://flyingfinance.com/
    Global Jet Capital: www.globaljetcapital.com
    National Aircraft Finance Association: www.nafa.aero
    PNC: www.pnc.com/en/corporate-and-institutional.html

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