How to Finance an Aircraft
Aviation financing is a cornerstone of the aviation industry, providing pathways for individuals and businesses to acquire aircraft and expand fleets. Whether you're purchasing your first aircraft or upgrading an existing one, understanding the nuances of aviation financing is essential. This guide details each stage, empowering you to confidently navigate the financial and legal landscape of aircraft acquisition.
What is Aviation Financing?
Aviation financing refers to the specialized process of securing funds to acquire aircraft. Unlike general equipment financing, it involves unique considerations like aircraft registration, regulatory compliance, and maintenance obligations. Typically, the individual financing an aircraft has a closely held entity that is the borrower, with the individual who owns the entity being the guarantor.
Assessing the Need for Aircraft Acquisition
For those that charter regularly or own a fraction of an aircraft, the decision of owning an aircraft is often simpler. For those who are considering their first aircraft purchase, the decision may be a little tougher
Range and capacity requirements: how long do you have to go with how many people?
Operational costs: How much am I willing to spend per year?
Maintenance and crew availability: can I keep this airplane flying?
Resale value and depreciation rates: Am I ok with the depreciation expected with this aircraft?
When assessing the need for an aircraft, consider engaging with an aircraft broker that is trusted and has credentials through the International Aircraft Dealer’s Association (IADA) or Global Aircraft Dealer’s Association (GLADA). Their expertise will save you money and a lot of headache through the buying process.
Exploring Financing Options
Aviation financing offers a variety of funding models to suit different needs:
Traditional Loans: Fixed or variable-rate loans provided by banks or aviation finance companies.
Leasing: Options like operating leases and finance leases allow flexibility without full ownership.
Private Financing: High-net-worth individuals or private investors will offer bespoke financing solutions. The cost is usually higher for these options.
Each option carries its own advantages, depending on your cash flow and long-term plans. If you are looking for guidance, consider speaking with an aviation loan professional.
Aircraft Appraisal and Valuation
An independent aircraft appraisal provides an accurate value, helping both buyers and lenders understand the asset's worth. Factors influencing appraisal include:
Aircraft age and hours flown
Maintenance history
Market demand and trends
Upgrades or modifications
An accurate valuation also impacts loan-to-value ratios, influencing the financing structure.
Structuring the Financing Agreement
Negotiating financing agreements is a collaborative process between the buyer, lender, and legal advisors. Key elements to address include:
Repayment schedules
Interest rates and fees
Terms for early repayment
Penalties for default
The agreement should be clear, transparent, and tailored to your financial goals. Our team at Prestige has the experience and expertise to help guide you on what to push back on when considering the purchase of a business jet.
Aircraft Insurance Requirements
Comprehensive insurance coverage is mandatory for financed aircraft. Policies typically cover:
Hull damage and liability
Third-party liability
Crew and passenger insurance
Loss of license coverage for pilots
Lenders always require proof of insurance before releasing funds. These documents and policies need to be approved by the lender before, so there is always a need to engage early and often. Using an advisor like an aircraft finance company will allow you to not have to worry about this step.
Closing the Deal
The final stage involves the legal transfer of ownership. This includes:
Registering the aircraft with aviation authorities, usually done through a title and escrow agency.
Completing legal and financial documentation: this will be agreed upon prior to closing day.
Disbursing funds to the seller: through the escrow company, funds will be distributed to the seller.
Why Aviation Financing Expertise Matters
Aviation financing is complex, requiring industry-specific knowledge and a robust support network. Working with experienced professionals simplifies the process, mitigates risks, and ensures successful outcomes.
FAQs
How does aviation financing differ from traditional loans?
Aviation financing incorporates specialized considerations like aircraft valuation, compliance with aviation regulations, and maintenance obligations, which are unique to the aviation industry.
What are the common financing options available for aircraft acquisition?
Options include traditional loans, leasing, private financing, and syndicated loans, each tailored to different financial goals and operational needs.
Do I need a pre-purchase inspection for a financed aircraft?
Yes, a pre-purchase inspection ensures the aircraft meets quality and safety standards, protecting both the buyer and the lender.
What role do escrow agents play in aviation transactions?
Escrow agents manage funds during the closing process, ensuring secure and transparent transactions between buyers and sellers.
Is insurance mandatory for financed aircraft?
Yes, lenders require comprehensive insurance coverage to protect the aircraft and associated liabilities.
Can aviation financing cover used aircraft?
Absolutely. Many financing options support pre-owned aircraft, provided they meet appraisal and regulatory standards.