How to Better Understand Your Financing Offer

There’s more to receiving and understanding an offer of aircraft financing than meets the eye. 1st Source Bank's Michael Francis explains why borrowers need to understand their goals to receive a bank’s ‘best terms’.

A potential new client, to whom I had recently submitted a financing offer, called and asked the following question:

“I received quotes from three banks, including yours, to finance my new plane. My credit disclosure was the same for each lender and the plane was the same, yet the terms were widely different. Why are the terms I received so disparate? Shouldn’t they be similar?”

The rates ranged by 1.0%, closing fees varied by $10,000, pre-payment penalties differed, and amortization varied by four years. Although this wasn’t an unusual situation (it’s rare I’m the sole competitor for a transaction), I can appreciate the question and can understand the client’s frustration in trying to determine which is the best deal.

Why the disparity? The answer has to do with the client’s expectations, goals and understanding of each bank’s target borrower profile. 

This all takes time, but so does evaluating the merits of each lender’s offer when they’re so far apart.

What’s the best way to obtain competitive and accurate offers? It starts with determining and discussing what objectives you are trying to achieve with the loan, and understanding the lender’s profile to ensure it’s aligned with yours.

“Just Give me Your Best Terms!”

I hear this often when speaking with potential borrowers or their representative for the first time. It’s a puzzling and often time-wasting exercise for both parties. Without knowing the goals of a borrower, how can a lender offer its “best terms”?

Left to their own devices, bankers will make an educated guess about what a borrower wants, often resulting in widely disparate terms among the bidders. Rather than asking blindly for “best terms,” start with detailing your goals, whether preserving capital by putting a minimum amount down, maximizing cash flow, chartering the aircraft, limiting financial disclosure, etc.

The more insight borrowers can provide a lender about what they hope to achieve with the financing, the more relevant the quoted terms will be to meeting those expectations.

Evaluating a Lender

Lenders are not all things to all people. I regularly turn away business which doesn’t fit my bank’s profile and suggest calling one of my competitors who would be a better fit. This approach rings true with many of the other bankers I know in the industry, but not all bankers (which is sometimes why an “outlier” offer may come in).

So how does a prospective borrower prevent getting an outlier offer? Start by interviewing the lender and asking some basic questions to determine if they fit your profile:

1. How many of my type of aircraft do you have in your portfolio?
2. What’s the average size loan (in dollars) your bank funds?
3. Give me a general idea for what your average credit profile looks like.
4. Will I receive better terms if I’m an existing customer of your bank?

Don’t have time to do this? Consider talking with the aircraft broker, or manufacturing sales representative, whom you used to acquire your aircraft. It’s likely they interact with lenders on a regular basis with your make/model aircraft. Further, there are aircraft finance brokers who (for a fee) will do the research for you.

The Art and Science of Loan Terms

When lenders quote on an opportunity, they’re considering a plethora of items, with the following being some of the basic considerations:

1. Financial strength of the credit
2. Characteristics of the asset
3. Risks with the loan structure
4. Character of the borrower.

Nearly all lenders have policies and metrics they use to categorize the risks of these items and assign a numerical grade to a borrower. This impacts the terms a banker can offer. How banks work with these policies, grades and metrics, and the implications they have on the loan terms varies. However, the concept is nearly universal and can result in disparity among different lenders’ terms.

A common example of a policy is whether or not an aircraft is enrolled in an engine maintenance program. Generally speaking, aircraft which are not enrolled in an engine program have more conservative loan terms, but how conservative depends on the bank’s policies.

The policy may be hard, (i.e.: max amortization is 10 years) for one bank, and non-existent for another. Although the credit disclosure and facts haven’t necessarily changed between the two banks, due to the policy, the loan terms offered may be different depending on the lender’s risk appetite.

Bankers may not disclose what their policy limitations are, but the result will be obvious if there is disparity between offers.

The example above is the “science” which goes into an offer, but what about the art?

Negotiation 101 would tell you not to lay all your cards on the table at first. Knowing there is competition for a particular opportunity (almost always the case) would cause a banker to leave a little on the table, knowing they’ll need to negotiate.

This can be exacerbated if the name of the competition is known to either of the bankers. If Bank A has very low rates, but doesn’t like the particular make/model aircraft as much as Bank B, Bank B’s offer may have a higher loan amount and/or amortization to mitigate their higher rate.

If the borrower clearly states their goals upfront (low rate, and/or high loan amount) that would increase the likelihood the lenders won’t provide offers which run counter to those goals.

Time is Money

The primary reason to acquire a private aircraft is to save time, which usually equates to money too if the proverb is true. Aircraft buyers usually spend a lot of time determining if an aircraft fits their mission profile, but often not enough evaluating other parts of the acquisition, such as their lender.

If time truly is money, aircraft buyers are wise to carry that methodology all the way through the acquisition process.

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