Aircraft Finance FAQ's
offers the following information and guidance as you consider
financing your aircraft:
review our evaluation process in advance with clients in an effort to
"flag" issues that may arise during an evaluation. The "4 C's" are
the benchmarks used to evaluate a financing prospect, and involve a
review of Credit, Cash flows, Collateral, and Character.
Part I - Credit:'
The credit report is a picture of an individual's payment history and
paying habits. The length of time a borrower takes to make a payment
impacts the cost to the fundor. For example, if a borrower is
consistently 30 days past due on payments, the fundor would assume
additional exposure and cost of funds for the extra 30 days and pass this cost along in
the form of a higher interest rate.
review focuses on the credit report - an individual's past 10 years'
credit activity - with an emphasis on the most recent 2 years.
Derogatory items are kept on the report for up to 10 years (depending
on the type of information), while positive information will remain
indefinitely. The credit report details the recent payment history,
amount of credit owing, length of time credit established, types of
credit established, and an individual's search for and acquisition of
new credit. Each of these factors play into influencing an
individual's credit "score".
obtained from a credit report that impact the credit score include:
balances on revolving credit facilities (credit cards),
- Established credit history
- Established "high credit" (consistent with projected loan value)
- Requests for new credit
- Judgments, charge-offs, credit accounts closed by creditor
credit report and credit scores are not used solely - as they are with
auto loans and credit cards, they play a substantial role in the
Part II - Cash Flows:
This element is key to determining the "affordability" of an
aircraft. The key component to a cash flow review is an analysis of a
clients' "debt ratio". The debt ratio is the relationship of gross
monthly income to net monthly payments. The debt ratio is an
individual's cash position relative to current expenses, and, with
common assumptions for tax burden and living expenses; it provides
insight as to the ability to afford the new aircraft payment. An
example analysis is illustrated below:
Monthly Income ($240,000/ yr.)
Net Monthly Expenses
estate mortgages, home equity loans,
loans and leases,
cards - monthly payments,
lines and other loans,
- New loan
Net Monthly Payments
for Monthly Living Expenses (~25%)
income is averaged from historical tax returns, pay stubs, W2s, 1099s,
or other income-proving sources. Net monthly payments are derived
from the credit report and personal financial statement. With
allowances for tax and general living expenses, most lenders target a
minimum of 40-45% with some flexibility based on other strengths.
Part III - Collateral:'
strength of the collateral (aircraft) value in a loan transaction
assists in securing the financing. Lenders generally conduct a
desktop appraisal of an aircraft, using one of the industry-accepted
sources (Aircraft "Bluebook" Price Digest, Vref). For larger
transactions or "over book" valuations, fundors may also require a
physical appraisal of the aircraft and logbooks.
often require 10% equity in the aircraft as a minimum. This may vary
depending on the size of the transaction and strength of the
collateral. For larger aircraft (business jets), where the corporate
guaranty is A+ credit strength, 100% financing may be available. In
some cases, where higher utilization of the aircraft is anticipated, a
fundor may require additional equity in the aircraft from the
onset of the loan (20% to 30% for a leaseback to a flight school for
In addition to
the normal criteria for valuing aircraft, recent attention has focused
more sharply on the avionics, paint and interior condition of the
collateral. As avionics systems have upgraded exponentially in recent
years, attention is paid to the age (date of installation). Damage
history - particularly if recent, and completeness of logbooks can
also weigh heavily on valuations in today's market.
with credit and taking proactive measures to correct errors are
invaluable in the hunt to secure financing. A regular review of
credit will also assist in protecting against the fraud issues
prevalent today. There are three credit reporting agencies that most
finance companies use: Trans Union, Equifax, and Experian. Credit
reports from these bureaus can be obtained via the Internet either
directly through each company or try
and issues that may be on a credit report:
- old accounts
- duplicate accounts
- accounts that don't belong to the applicant
- inaccurate reporting of delinquencies
- problem accounts where the applicant acted as a "co-signor"
- old delinquencies or credit problems that should have been removed
reports are available through various credit agencies that can assist
with familiarity with credit.
Subscription to one of these services will inform of any changes to an
individual's report, and detail recent inquiries to obtain credit
will show up on an individual's credit report up to 10 years after the
final settlement or discharge. The impact on the individual's ability
to obtain a new aircraft loan will depend on:
- How long
ago were the bankruptcy and the discharge?
- What is the reason for the bankruptcy?
- Has the individual re-established credit?
- Has the re-established credit been maintained well?
A client who
has filed bankruptcy, whether for personal reasons (medical expenses/
student loans), corporate reasons (contingent liabilities to a
company), or other circumstances (lawsuit), may still be able to
qualify. Terms for a client with a past bankruptcy may be different,
depending on the factors listed above. We will try to structure a
program that will accommodate their situation and, if this effort does
not result in financing, we can usually refer the client to an
One of the
more frequent opinions offered is "my client filed once, but cannot
file again so he should be creditworthy". While it is true that an
individual is only permitted one filing of bankruptcy, there is no
guarantee that an individual will not have a problem similar to that
which caused the bankruptcy filing. From a lender's perspective,
there is no ability to clear these new debts with a bankruptcy, and
the recourse would be to file suit against the individual, liquidate
assets, or incarcerate - a long and painful process.
One of the key
requirements for financing is a careful review of federal tax
returns. Tax returns speak volumes to the strength of a prospect.
The goal in an
evaluation is to understand the clients' recurring annual income. By
carefully analyzing the tax returns, we maximize the client's cash
flow. For example, we add back non-cash deductions (i.e.
depreciation) and all sheltered income in a Schedule C and Schedule
E. Other non-cash deductions may be offset in a K-1 (partnership
statement). Net loss carry-forward, occasional capital gains, and
passive losses are evaluated to determine the true recurring cash
flows over a period of time.
returns may range from 5 to 205 pages, we are intimately familiar with
the evaluation and will track the cash flows through to the strength
of the entity financing the aircraft.
Yes, we will need to review the associated corporate documentation before moving forward with closing:
- Limited Liability Company - Articles of Organization and Operating Agreement
- Corporation - Certification of Incorporation & By-Laws
What financial documentation do I need to provide to apply for a loan?
- Completed Application
- Personal Financial Statement
- 2 Years Tax Returns
- Personal - first 2 pages, including the schedules
- Business (if applicable) - first 4 pages
- Verification of liquid assets
What is the required down payment?
For a personal use aircraft, you are required to put down a minimum of 10%. In general, for commercial use, you will need a 20% - 30% down payment. 100% financing is not available.
Can I finance sales tax?
No. The financed amount can only be based on the purchase price or the value of the aircraft. It is the responsibility of the purchaser to pay any taxes related to the sale.