The Ultimate Guide to Financing Your First Aircraft

Acquiring your first aircraft is a significant milestone, whether your mission is personal, business, or commercial use.  If you plan to finance your purchase, you should understand that the process of financing such a substantial purchase can be complex, and requires research and planning.  This comprehensive guide provides the insights you need to navigate the aircraft financing landscape with confidence.

Understanding the Aircraft Financing Landscape

Financing an aircraft is not as straightforward as securing a loan for a car or a house. The unique characteristics of aircraft, including their high value, specialized use, and maintenance requirements, make financing them a specialized field.

Why Aircraft Financing Is Unique

Aircraft are high-value assets that depreciate differently compared to traditional assets. They are also mobile, and their value can be influenced by technological advancements and market demand. These factors affect how lenders assess risk and structure loans. Moreover, regulatory considerations in the aviation industry add layers of complexity to the financing process.

The Role of Aircraft Type and Usage

The intended use of the aircraft—whether for personal, business, or commercial purposes—impacts financing options. Business jets used for corporate travel may have different financing terms compared to planes used for charter operations.

Types of Aircraft Financing Options

Several financing avenues are available, each with distinct features, advantages, and considerations.

  • Traditional Bank Loans — Conventional term loans from banks are structured similarly to home mortgages. Normal down payments are 15% for loans under $1 million, and 20% for loans over $1mm. 30% down may be required if chartering. Banks look for consistent cash flow over 2-3 years, and liquidity that can cover the down payment, plus a cost-of-ownership allowance, and debt service coverage for several months. Personal guarantees are standard. Projected charter or flight school leaseback income is not considered. It’s best to work with a bank that specialized in aircraft financing, as the process will go much more smoothly;
  • Asset-Based Lending — In asset-based lending, the aircraft itself serves as collateral, but this kind of financing is not the norm, and there are only a couple of lenders that will consider it, for specific makes, models and ages of aircraft. Limited charter may be allowed with these lenders. Lender may cap usage at 400 hours annually to ensure the depreciation curve isn’t accelerated.
  • Lease Financing — Leasing provides the use of the aircraft without owning it outright. There are two primary types of leases:
    • Operating Leases: Similar to renting, where you lease the aircraft for a set period and return it at the end.
    • Finance Leases: More akin to a loan, where you have the option to purchase the aircraft at the end of the lease term. Finance leases can offer 100% financing, but terms and amortizations are usually shorter than they are for term loans, so payments are higher. Finance leases are usually only for businesses.

Preparing for the Financing Process

Preparation is key to securing favorable financing terms and ensuring a smooth transaction. You may want to consider working with a reputable aircraft financing broker, such as The Aircraft Lenders. Not only will a good finance broker be able to recommend the best lender for your financials, the aircraft, and your mission, they will pre-underwrite to ensure you are on track for an approval. The best finance brokers know how to package your financial package in its best light.

Assessing Your Financial Position

Determine how the aircraft purchase fits into your overall financial strategy. Consider consulting with a reputable aircraft financing broker who understands the nuances of aircraft funding and how to match you with the right lender

Creditworthiness and Documentation

Lenders will require comprehensive documentation, including:

  • Current personal and business financial statements
  • 2-3 years of Personal and Business Tax returns
  • Proof of liquidity (bank and brokerage statements)
  • Debt schedules for your businesses
  • A completed application authorizing a credit pull

A strong credit history will enhance your ability to secure better terms.

The Importance of Aircraft Appraisals

Getting a handle on aircraft value is an important part of the buying process. The bank will lend a percentage of the aircraft’s value or purchase price, whichever is less. A good aircraft finance broker will help you value the aircraft you are considering by running a Vref or Bluebook valuation on it. Sometimes, especially for purchases over $1mm, an independent appraisal is required at the buyer’s expense.

Choosing the Right Financing Option

Selecting the appropriate financing option involves weighing various factors against your financial goals.

Interest Rates and Terms

Interest rates in aircraft loans can vary significantly. Factors influencing rates include:

  • Loan amount and term length
  • Type and age of the aircraft
  • Your credit profile
  • The aircraft mission
  • Lender’s assessment of risk

Consider how fixed or variable rates align with your risk tolerance and market expectations.

Loan Structures

Understanding different loan structures can help optimize your financial benefits.

  • Amortization Schedules: Determines how payments are spread over time.
  • Balloon Payments: A large payment due at the end of the loan term, which can lower monthly payments but requires planning for the lump sum.
  • Residual Values: Reflects the estimated value of the aircraft at the end of the loan term, impacting lease structures.

Tax Implications

Ownership and use of an aircraft can have significant tax consequences, including potential deductions and depreciation benefits. Laws vary by jurisdiction, so it’s essential to consult with tax professionals experienced in aviation. The Aircraft Lenders partners with many such experts, and is happy to make referrals.

Navigating the Purchase Process

Beyond financing, the purchase process involves several critical steps to ensure a sound investment.

Selecting the Right Aircraft

Consider your specific needs:

  • Capacity: How many passengers will you typically carry?
  • Range: What distances will you frequently fly?
  • Performance: Do you require short takeoff and landing capabilities?

Assess whether a new or pre-owned aircraft aligns better with your objectives. New aircraft come with the latest technology and warranties but at a higher cost. There can also be a substantial wait for a new aircraft, and manufacturers expect progress payments which can’t be financed. Pre-owned aircraft offer savings but may have higher maintenance expenses.

Working with Dealers and Brokers —

Engaging reputable dealers or brokers can provide access to a broader market and expertise in negotiation. They can assist with:

  • Market analysis
  • Price benchmarking
  • Managing offers and counteroffers

Due Diligence

Thorough due diligence protects you from unforeseen liabilities:

  • Mechanical Inspections: A thorough pre-buy inspection by a qualified A &P mechanic will identify any mechanical issues or concerns.
  • Maintenance Records Review: Ensures the aircraft has been properly maintained according to regulations, and that records are complete and consecutive. Missing logs greatly affect aircraft value.
  • Title Search: Verifies that the aircraft has a clear title without liens or encumbrances.

Closing the Deal

Finalizing the purchase involves legal, regulatory, and logistical considerations.

The Closing Process

  • Purchase Agreement: You should always have a purchase agreement that governs the terms of any deposits, along with the terms of the purchase. Will there be a pre-buy? Under what conditions can you get out of the purchase?
  • Escrow Title Agency: You should always close an aircraft purchase through a reputable aircraft escrow-title agency who will handle the title search and ensure the FAA filings are done properly.
  • Legal: You should carefully  review all contracts, including purchase agreements and financing documents. Ensure all terms are clearly defined and understood. For larger purchases, you may want to consult with a legal professional.

Insurance and Risk Management

Aircraft insurance is specialized and often more complex than standard insurance policies. Coverage should include:

  • Hull Insurance: Protects against physical damage to the aircraft.
  • Liability Insurance: Covers legal liabilities arising from the operation of the aircraft.
  • Additional Coverage: May include protection against loss of use, acts of war, or other specific risks.

Consult with insurance brokers who specialize in aviation to secure comprehensive coverage. When you finance an aircraft, the lender will have insurance requirements that need to be met, and they will need to be named as a lienholder on the policy.

Understanding Ongoing Ownership Costs

Ownership entails ongoing expenses beyond the initial purchase and financing.

Maintenance and Repairs

Regular maintenance is essential for safety and regulatory compliance. Budget for:

  • Scheduled maintenance
  • Unscheduled repairs
  • Engine overhauls

Maintenance costs can vary widely based on the aircraft type and age.

Operating Costs

Operating an aircraft includes expenses such as:

  • Fuel costs
  • Crew salaries and training
  • Hangar fees
  • Navigation and landing fees

Understanding these costs helps in budgeting and decision-making.

Upgrades and Modifications

You may wish to upgrade avionics, interiors, or other systems. Upgrades can often be financed, either at the time of purchase or later. Factor these potential investments into your long-term financial planning.

Maximizing the Value of Your Aircraft

Consider strategies to enhance the value and utility of your aircraft.

Regular Market Valuations

Periodic appraisals can help you stay informed about your aircraft’s market value, aiding in financial planning and potential future sales.

Proactive Asset Management

Engage professional management services to handle operations, maintenance, and compliance, ensuring your aircraft remains in optimal condition.

The Role of Technology and Market Trends

Stay informed about advancements and trends in the aviation industry.

Emerging Technologies

Technological innovations can impact the value and efficiency of your aircraft. Consider:

  • Next-generation avionics
  • Enhanced fuel efficiency
  • Advances in safety features

Market Dynamics

Global economic conditions, fuel prices, and regulatory changes can affect operating costs and aircraft values. Monitoring market trends helps in making informed decisions.

Frequently Asked Questions

What are the typical interest rates for aircraft loans?

Interest rates for aircraft loans can vary widely. At the time writing, rates range from about 6% – 8%, depending on factors such as the lender, loan amount, term length, aircraft type, aircraft age, aircraft mission, and your credit profile. Rates may be higher than traditional loans due to the specialized nature of airplane financing options.

Can I finance a pre-owned aircraft?

Absolutely. Most aviation lenders offer financing for new or pre-owned aircraft. The financing terms may vary based on the aircraft’s age, condition, and market demand, as well as on price point and mission. Lenders may require detailed maintenance records, as well as pre-buy inspections and appraisals.

What is the difference between leasing and buying an aircraft?

Leasing allows you to use the aircraft without owning it, often with lower upfront costs but higher payments.

Buying involves purchasing the aircraft outright or through financing, providing ownership and equity in the asset.

How does aircraft depreciation affect financing?

Aircraft depreciation impacts the residual value over time, influencing loan structures and leasing terms. Lenders consider depreciation when determining amortization schedules and may include provisions like balloon payments. Understanding depreciation helps in choosing financing that aligns with your financial planning.

Are there tax benefits to owning an aircraft?

Yes, there can be significant tax benefits, such as accelerated depreciation, bonus depreciation, deductions for business use, and potential sales tax exemptions. These advantages are usually only applicable to businesses. Tax laws are complex and vary by jurisdiction, so it’s essential to work with tax professionals experienced in aviation.