What to know about financing your first aircraft

Financing an aircraft is in some ways like purchasing a house, and in other ways like buying a car — but different than both in its complexity. It involves a number of up-front decisions based on the purchaser’s usage of the aircraft and tax preferences. It also requires several specialized steps along the way, including detailed proof of your financial position, a considerable down payment, and several legal steps required for aircraft.

The good news is there are experts in the area of aircraft financing to help guide you and even oversee your financing needs from beginning to end. Someone new to aircraft purchase will certainly have the best chance to both ensure everything runs smoothly and get the best deal if they partner with one of these experts — be they an independent aviation financing broker or a bank working with aviation financing experts who oversee the process and work with you.

Jarrod Burton is the senior vice president of Echo Aviation Leasing Corporation in Montreal, Quebec. He works with a variety of clients from private owners to helicopter operators with large fleets. HeliTrader sat down with him to discuss the high-level aspects of what is involved in securing helicopter financing.

Burton emphasized that buyers put themselves in the best position when they consider their financing options and abilities well in advance of a helicopter purchase. This includes setting a budget and determining how they will account for taxes.

“There are basically two types of financing: lease financing and a loan,” said Burton. “Lease financing is like leasing a car; after the term you can purchase the aircraft. A loan is like it sounds, a straight loan. With lease financing you write off the lease payments, where with a loan you depreciate the aircraft and write off the interest payment. There is a lot more to it and it can get very complicated, so I recommend buyers talk with their accountants and determine the best route based off their needs and long-term goals with the aircraft.”

When it comes to securing a loan for your helicopter, Burton highly recommends buyers — especially first-time buyers — work with a financing company or bank with specific aviation experience and be talking with those aviation experts from the beginning.

“Step number one is finding the right partner and making sure you’re talking to the right people that speak the language that can help you,” noted Burton. “If you try to get the deal done with a personal banker or commercial account manager who doesn’t understand aviation, they’re going to struggle getting it done, and you’re going to get frustrated because they’re not able to put the deal together properly — or will take a very long time doing it.”

From there, Burton says the next step is putting together an underwriting package that gives the financier all the information needed to analyze the value of the aircraft and your ability to pay the loan. Most institutions will require three years of financial statements, either corporate tax returns or personal tax returns, and business financial statements or a personal net worth statement — depending on if the aircraft is being purchased by a company or an individual, Burton said. It is not uncommon for a financial institution to want to see a year to 18 months’ worth of loan payments in liquid assets as well.

Additionally, if an aircraft is already chosen, information on the aircraft should be in the package, including the pre-purchase inspection report, aircraft spec sheet, life component sheets, and a letter of intent to purchase or the signed purchase agreement. However, Burton warns, do not have an aircraft appraisal done until the lender is on board, as that lender will want a hand in the appraisal.

Pulling all of this information together early will save a lot of time, eliminating the back and forth of the institution asking for more information, added Burton.

When meeting with the financier, in addition to supplying the underwriting package, be prepared to provide direction on the type of financing and structure you’re seeking, including how much money you are prepared to put down and how much per month you are able to pay.

“Most financiers will require 15 to 25 percent down and offer 12 to 15 years of payments for a new aircraft, and eight to 10 for a used aircraft. But there is sometimes room to negotiate,” said Burton. “Some banks are black and white, but others will have some back and forth once the indicative term sheet that outlines the terms is presented. With a company like us, where we help secure financing, it is valuable to know what the buyer can do so we’re not working with financiers who demand more. It is really important to have an open dialogue.”

Burton emphasized that rates are in constant fluctuation, but terms can be negotiated. From his perspective, a 10-year term with 15 to 20 percent down is fairly typical.

From there, when terms are agreed upon, the financier will ask for a good faith deposit to begin the extensive underwriting process. Burton advises buyers to be ready to answer a lot of questions during this period of the process. Underwriters could ask for contracts to prove income planned for the aircraft or further details on a high-net-worth individual’s finances.

Once underwriting is done, which can take a couple of weeks, the proposal is submitted to an adjudicator who will either approve, decline, or approve the transaction with modifications. This is where the buyer will make a decision to accept or decline the offer. Burton says the deposit is refundable if the loan is denied, and often refundable when modifications don’t work for the customer. However, if the terms agreed upon prior to underwriting are approved, but the customer walks away, the deposit is often lost.

Once accepted by the customer, an approved loan is then overseen by an aviation attorney who will start documenting the transaction and overseeing aviation-related details such as aircraft registry.

The overall process can take four to six weeks, Burton said, which is why he emphasizes the importance of working with the right people from the beginning to save time and money.

“Some people use an aviation specialist for the whole buying process, and while it can be more expensive, it is a lot quicker,” he said. “I tell people that price and cost are two different things. They may charge more per hour, but they’ll do it in half the time. Lawyers without this competency can often struggle to get the deal across the line.”

Burton also emphasizes that buyers be prepared for closing costs, from the set-up fee for the financial institution to the appraisal and legal closing work. He says it’s not uncommon for these costs to be about one to two percent of the aircraft’s value — depending on the aircraft’s value. The higher the value of the aircraft, the closer these costs are to one percent of the aircraft value.

In the end, Burton said the two very important things a buyer can do to ensure the smoothest possible financing process are work with a financier with aviation specialists or an aviation focus, and start conversations with those people very early in the process — even before settling on an aircraft, if possible.

“Some aircraft are hard to finance, others may have restrictions, so I always encourage buyers to pick up the phone and talk to a lender early,” said Burton. “Tell them what kind of aircraft you’re looking for and what you’re using it for. They’ll talk you through how it would be financed, or if it could be financed, as well as your ability to qualify for the loan. It doesn’t cost you any money to have those conversations early and get feedback from your lender.”