Mastering aircraft financing: A comprehensive guide to buying your dream plane.

Purchasing an aircraft is a major milestone for many aviation enthusiasts and businesses alike. Whether you’re a first-time buyer or an experienced owner looking to upgrade, securing the right financing is a critical step. Aircraft financing has its own unique requirements and challenges which can be overwhelming for new buyers. Accordingly, Commerce Bank has prepared this article to walk you through everything you need to know.

The basics.

While aircraft financing shares similarities with other types of loans, it’s not as straightforward as financing a car, real estate, or even your business. The unique nature of aviation requires special consideration from both the buyer and the lender. Here’s a look at some key concepts:

• Loan-to-value (LTV) ratio: One of the first things you’ll need to understand is how much of the aircraft’s value can be financed. The LTV ratio indicates the percentage of the plane’s worth that the lender is willing to cover. The remaining cost is covered by the buyer, often as a down payment. The LTV ratio can be influenced by several factors, including the type of aircraft, its age, and your credit worthiness.
• Interest rates: Interest rates in aviation finance tend to fluctuate with market conditions and the specifics of your financial profile. Your credit score, the loan amount, and the term length all play a role in determining your rate. Unlike other loans, aircraft finance rates are often more variable and can be adjusted based on the uniqueness of the transaction.
• Collateral and liens: To secure the loan, lenders will place a lien on the aircraft, meaning they have a legal interest in it until the loan is paid off. This provides protection to the lender in case of default but also ensures you’re fully responsible for the aircraft’s care during the loan period. Depending on the asset, this can include FAA and International Registry filings, escrows and title lien searches.

Factors that shape aircraft loan terms.

Several issues come into play when applying for aircraft financing. Understanding these will help you tailor your approach and set realistic expectations:

• Aircraft age and type: Newer planes generally secure higher LTV ratios due to their longer lifespan and better resale value, while older aircraft may be subject to stricter terms, higher interest rates, or lower LTV ratios, reflecting depreciation.
• Usage: How you plan to use the aircraft matters. Planes that will be used for private, non-commercial purposes may have different financing structures compared to those used for charter or air transport. Heavier commercial use can reduce the LTV ratio and influence the loan’s risk profile.
• Borrower’s financial standing: Your credit score, income, liquidity, and overall financial history will be scrutinized by lenders. For larger aircraft or more complex transactions, business financials may also need to be evaluated, especially if you plan to register the aircraft under a business entity.

Preparing for the aircraft loan process.

Before you start shopping for an aircraft, proper preparation will help you have a good buying experience and avoid potential pitfalls.

• Assess your financial health: Lenders want to see a clear picture of your financial situation. This includes recent tax returns, financial statements, and liquidity reports. It’s common for borrowers with multiple businesses or complex income streams to need more documentation to prove their ability to repay the loan.
• Plan for a down payment: Aircraft financing typically requires a down payment of 15–20% of the aircraft’s value. This can fluctuate based on your creditworthiness and the aircraft's condition. Make sure your liquid assets are sufficient to cover this requirement, as well as additional costs like taxes, insurance and maintenance reserves.
• Consider long-term costs: Owning an aircraft isn’t just about the purchase price. Long-term operational expenses such as fuel, maintenance, inspections and storage can add up quickly. Plan for these in advance to avoid financial strain after your purchase.

Steps to securing aircraft financing.

• Pre-qualification: Before you begin your aircraft search, it’s smart to get pre-qualified for financing. This will give you a realistic budget and help you move quickly when you find the right plane. Pre-qualification involves a soft credit check and a review of your financials by potential lenders.
• Find your aircraft: Once pre-qualified, you can start exploring aircraft that fit your budget and needs through online platforms and brokers.
• Finalize your loan application: After selecting an aircraft, you’ll move forward with the loan application. Lenders may request additional financial documents at this stage, and you may need to work with appraisers to determine the aircraft’s current market value.
• Purchase agreement and pre-purchase inspection: After negotiations, you’ll draft a purchase agreement that outlines the transaction’s terms. Many lenders require a pre-purchase inspection by a neutral third party to ensure the aircraft is in good condition.
• Insurance and escrow: Lenders will require that you secure appropriate insurance coverage before closing. At this stage, escrow services are engaged to facilitate the safe transfer of funds and titles between the buyer and seller.

Closing the deal.

Once your financing is approved, and all the terms are agreed upon, you’re ready for the closing. During this final phase, the lender disburses the funds, and you officially take ownership of the aircraft. It’s crucial to ensure that all required documentation, including inspection reports and maintenance records, is complete. Additionally, the escrow company will verify that the title is clear of any previous liens or ownership issues, ensuring a smooth transition.

Aircraft financing is a specialized process that requires thorough planning, careful negotiation, and attention to detail. By understanding the various factors that impact loan terms and preparing in advance, you can ensure a smooth buying experience, but perhaps the most important step you can take is to consult with experienced professionals, such as those at Commerce Bank, who can help you navigate the complexities so you make informed decisions.

Owning your own aircraft is an incredible achievement, and with the right approach to financing, you can make this dream a reality while minimizing your financial risk.