How Can Financing Terms Impact your Flight Ops?

Planning to finance your next aircraft? What are the restrictions that lenders may impose on the operation of your aircraft? Gerrard Cowan asks the experts, outlining how such stipulations can serve the bank’s and borrower’s best interests simultaneously.

Gerrard Cowan  |  11th May 2023
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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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    How restrictive are aircraft financing terms?

    While many aircraft owners finance the purchase of their aircraft, financing can impose restrictions and costs that operators should carefully consider before going ahead with a deal, though such stipulations could also offer significant benefits to the owner.

    Mike Smith is President of Scope Aircraft Finance and a long-time member of the National Aircraft Finance Association (NAFA). He explains that every lending institution has its own process and approach to aircraft lending.

    “I like the word ‘guidelines’ instead of ‘restrictions’ because an experienced lender will design a loan structure to match the borrower needs while keeping in line with the lending institution’s risk profile,” he says.

    In a good lending relationship, both the borrower and lender will understand what usage is allowed per the loan terms well in advance of the loan closing, Smith adds.

    “Some examples of guidelines could be maximum hours flown per year and guidelines around usage of the aircraft in charter operations,” he illustrates. “Each lending institution has its own parameters related to aircraft size, age, and more, and the associated ‘guidelines’ tied to the individual aircraft will vary among institutions.”

    As well as annual usage and type of usage (e.g., Part 135 vs Part 91), there are several other potential factors that lending institutions will take into account, highlights Chris Lee, Vice President of the Aircraft Division at 1st Source Bank. He points to the type and amount of insurance, for example.

    And Lee says lenders would look at areas such as engine maintenance programs, international usage (with limitations or permissions likely needed), and the amount of the purchase price that will be financed. “This restriction could impose a higher cash outlay burden on the enterprise, which could affect operations,” he adds.

    The age, size and type of aircraft in question could also impact the terms, “but it really depends on a number of factors”, says Lee. “A typical example of this would be a shorter term on an older aircraft.”

    Adam Meredith, President of AOPA Finance Company, says other areas of consideration could include restrictions around dry leasing the aircraft.

    “Geographical restrictions usually prohibit operating the aircraft in certain countries and high-risk areas unless there’s proof of insurance,” he adds. “Depending on the aircraft (and lender) we regularly see Engine/Maintenance Reporting programs required.

    “Specifically, certain lenders will mandate the aircraft be on an engine maintenance program, and some may also require [maintenance] reporting programs like a Continuous Airworthiness Management Program (CAMP).”

    Financing Terms Can Benefit Borrower and Lender

    Such restrictions or guidelines could naturally impact the operating budget of the owner. However, the lender is generally looking to preserve the value of the aircraft, Meredith notes, which not only benefits them in the case of a default, but also offers clear advantages to the owner.

    “As an example, an engine maintenance program can sometime be more expensive if there are no unexpected issues, but you also typically gain the advantage of the engine program’s leverage in getting maintenance done more expeditiously, and often times at a better rate than if you contracted for the work yourself.”

    Meredith also says the size/complexity, age and even particular make and model of the aircraft could impact financing requirements.

    “As an example, if the majority of the fleet for a particular make/model of aircraft are on a specific engine program and the aircraft you are purchasing is not currently enrolled, that aircraft is much less desirable than its peers and would likely be required to be enrolled in a program.”

    The financial impact of the loan on your operating budget depends on the individual institution and the loan structure, Smith says. While an engine program will be required by most institutions to provide funding for a business jet, it is important to ask a lender about any potential guidelines they may have.

    “These are important questions to ask a lender as you are working through the loan process before purchasing your aircraft, especially if there are financial implications to your ownership cost structure,” Smith notes.

    Smith also highlights the importance for both lender and buyer of many of the stipulations included in finance agreements, such as engine programs. And it is a similar story for guidelines around annual usage, he says.

    “A good aviation finance solution will attempt to match the aircraft’s expected usage to the finance terms and conditions,” he explains.

    “A high-utilization owner may not want very long terms because the high usage means an accelerated depreciation, so a shorter term may make more sense for both the bank and the owner. This effort can help prevent an owner from becoming underwater in the loan.”

    Take Time to Understand your Aircraft Finance Terms

    It is vital that operators have a good understanding of the loan structure and terms to ensure the proposal matches their needs and plans.

    “Having an understanding of the bank and expertise behind the loan you are considering is vital to a smooth process for both parties,” Smith says. “This is where the value of working with a NAFA member institution is fully realised.”

    Lee adds that operators should get pre-approval as early as possible in the process. “Your lender will conduct an appraisal of the aircraft during the approval process.

    Make sure you understand the lender’s idea of your aircraft value by asking questions. “Clients benefit from understanding their broker and their banker’s respective thoughts on the market value of their proposed aircraft prior to offers being made.”

    Additionally, he says that aviation finance providers want to ensure that their clients are prepared, with any financial restrictions imposed on a loan typically serving to protect both the lender and the client from over-exposure to risk. “Be open to understanding what – if any – restrictions exist, and why.”

    Aviation finance lenders can provide valuable straight talk and sound advice, Lee notes. “Some are lenders who don’t just understand finance but are also pilots and/or aircraft owners themselves.

    “So, if your lender has that experience, make them a part of your personal advisory council during the purchase, ownership, and sale processes as ultimately you’re in this together.”

    Another Set of Eyes for your Aircraft Transaction

    Even if you plan to pay off the loan early, an experienced aviation finance lender can help ensure another set of eyes have reviewed the paperwork during the closing process.

    “It amazes me how many times our experienced team has caught errors that were missed by the broker and the law firm hired by our client,” Lee notes.

    Just as all aircraft are not equal, not all lenders or finance companies are equal, Meredith stresses. It’s vital to ask how many transactions a lender does annually, and Meredith says he would be concerned if it is fewer than 20.

    Working with a financial institution that regularly does aircraft financing is critical. All too often we see folks scrambling at the last minute to find financing because their local banker thought they could get a deal done, only to find out they can’t at the last hour for some reason.”

    So be prepared to look beyond what may be familiar in the first instance. “There are plenty of good options out there for financing,” Meredith concludes.

    More information from:
    1st Source Bank:
    AOPA Finance:
    National Aircraft Finance Association:
    Scope Aircraft Finance:

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