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Financing a private aircraft 101
Private aviation has the potential to unlock a world that
propels your business forward unlike anything you've
experienced before. Flexibility and versatility that come with
owning an aircraft allow you to reimagine the value of your
time. With Textron Aviation's extensive lineup of aircraft
solutions fit to everything from business to leisure to cargo
to humanitarian efforts, the opportunities truly are endless.
If you're newer to aviation, the concept of owning an aircraft
likely comes with a lot of questions. How do I finance an
aircraft? What are my options? Is the financing process
similar to other loans I've experienced? Do I need a financial
adviser to assist?
The short answer is likely what you imagined; it depends. We
recommend you tie in whomever you trust with your financial
decisions and start here. While we cannot and do not offer financial or tax advice, we have put together some general information for your consideration as you work through aircraft financing with your trusted advisors.
WHY FINANCE?
Financing an aircraft is a choice you can make based on your
personal or company's financial situation and preferences.
Aircraft buyers can buy an aircraft with cash and the
percentage of cash buyers has increased in recent years. But
there are still a great number of aircraft owners who finance
their aircraft purchase. Consult your financial advisor to
determine what's best for you or your company.
WHAT MATTERS
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Previous Aircraft Ownership
Lenders take into consideration any previous aircraft
ownership you may have had. This includes…
Previous turbine experience
Previous aircraft financing
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Corporate vs. Commercial use
Some lenders are more focused on one or the other.
-
Engine Programs
Engine programs are often required for lenders on
turbine aircraft. They can come from the engine
manufacturer or the aircraft manufacturer depending on the situation
and travel with the aircraft if you were to ever
sell. They operate like an insurance policy where
you pay a cost per flight hour to then have any
future engine issues covered. Consider engine
programs to be insurance against the residual. Engine Programs increase the value of the aircraft as well as positively differentiate the aircraft for future marketability.
-
Ownership Structure
This helps lenders understand who all is responsible
for financing of the aircraft.
-
Your Mission
Lenders consider how you intend to utilize your aircraft.
If you are operating under Part 91, you'll follow
regulations for generally non-commercial aircraft. If you
are operating under Part 135, you'll follow regulations
for commercial operations, which are more restrictive and
require more training. Some lenders only focus on Part 91
operators, so you'll want to keep that in mind. Lenders
are also interested in whether you'll be using the
aircraft more per year than the average owner, which in turn,
may have an affect on the amortization of the aircraft.
-
Trade In Opportunities
Just like if you're trading in your vehicle and looking at
taking out a new car loan, lenders in aviation take into
consideration any equity in a current aircraft.
YOUR OPTIONS
Operating Lease
Again, similar to a vehicle, you can enter an operating
lease on the aircraft for a number of years. In this situation, your name is not directly on or tied to the title and you have no equity in the aircraft. Rather, your lessor's name is on the title, and you handle payments through them. It is a common misconception
that these leases allow for lower down payments. They are often similar to traditional loans in respect to out of pocket down payment requirements and dependent on buyer’s financial strength and credit history.
OR
Loan/Debt
A loan or debt is the most widely understood way of
economically financing an aircraft, as you likely have
encountered a loan before on a vehicle, home, etc. The
biggest difference is the term of the loan is amortized
over the same period of time. If you have a 20-year
mortgage, for instance, it is likely amortized over 20
years. However, in aviation, it is more common to have a
shorter term (typically five years) amortized over a
longer period of time. Once that term is up, you can
decide if you'd prefer to sell and invest in a new
aircraft, pay off the lump sum or refinance.
FINANCING CHANNELS
Commercial Banks
Who They Are
Banks that take deposits, manage
relationships/wealth and typically have a presence regionally, nationally or potentially worldwide.
Strengths
Due to many factors, commercial banks offer traditionally
lower rates. They leverage relationships and can be easy
to work with if you have a pre-existing relationship.
Leasing Companies
Who They Are
These are companies who have a greater stake in the
aircraft. They'll want to lease the aircraft to you and
then own the aircraft at the end of the term.
Strengths
Your payments are typically similar or lower compared to
commercial banks and there is no residual risk to you.
ECAs
Who They Are
ECAs stands for Export Credit Agencies. Some examples
include the United States Export Import Bank (Exlm) or
Export Development Canada (EDC) and focus on exporting
goods from their respective countries. For Textron
Aviation, this would include exports from the United
States to other countries.
Strengths
You're likely to find lower interest rates internationally
with ECAs. They also are available in many different
countries around the world where commercial banks or local
options may not be available or are more expensive.
CREDIT REQUIREMENTS
-
3 Years of Financials or Tax Returns on the Business
-
Ownership Structure of Company
-
Nature and History of Business
-
Formation Documents
-
Personal Financial Statements and 3 Years Tax Returns for
Shareholders
TERMINOLOGY
-
Loan Amount/Advance Rate/Loan to Value
These terms are all interchangeable. It is the amount you
are financing with a lender, expressed as an amount or
percent of purchase price.
-
Term vs. Amortization
The term is the amount of time you have to pay on your
loan. Amortization determines the rate at which the
principal balance is reduced. In aviation, it is most
common to have a shorter term than amortization period.
-
Floating vs. Fixed Rates
The decision between these two options rests with you.
Fixed rates, as indicated by the name, stay fixed
throughout your loan while floating rates change
periodically based on the market.
-
Index
Your rate is tied to an index. It serves as the baseline
of your rate with other contributing factors determining
the rate you receive.
-
Spread
Refers to the difference between the index and the
ultimate rate you receive. It is based on your financial
strength and condition.
-
Basis Point (bps)
The name Basis Point comes from the base move between two
percentages, indicating the spread. Basis Points are used
to show the spread between interest rates. For example,
100 Basis Points equals 1%.
-
Approval vs Proposal
A lender may send you a letter of interest or proposal
indicating payment terms for a potential loan. It could
indicate the lender is in the process of approving your
loan. However, a proposal is not an approval. It is
important to ensure you have your financing approved by
the lender when you take delivery of your aircraft.
-
Closing Fees vs. Broker Fees
Every bank charges closing fees but they vary across the
different lenders in different parts of the world. Broker
fees come into play if you bring in a broker to assist in
the purchase/financing. Working with OEMs like Textron
Aviation means you do not need a broker, but you may elect to
utilize one.
-
Cape Town International Registry
Serves as the international registry and protection of
aircraft interests and assets. Your home country often
requires additional registration processes.
-
Debt Covenants
Refers to specific financial limitations as a condition
with a loan. These can include restrictions on outside
spending, minimum cash balances, or other restrictions
that if violated, put you in default of your loan. They do
not apply to all loans.
SUMMARY
In summary, there are several different options when you’re
looking at investing in your new aircraft. It serves to have
some knowledge of these options and include your financial
advisers in helping you make the best decision. When purchasing from Textron Aviation, representatives from our sister company, Textron Financial Corporation, become valuable advisers and help you navigate the aviation finance world.
Interested in finding the best aircraft for your mission?
Contact a sales representative to start the process now.
Contact A Sales Rep