How Does Business Aircraft Finance Work?

What are the sources of funding available, the typical length, and the interest rate of an aircraft financing agreement? And how can buyers give themselves the best chance of securing favorable terms? René Armas Maes offers insights…

René Armas Maes  |  26th March 2020
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René Armas Maes
René Armas Maes

René Armas Maes, Vice President, Commercial, Jet Link International LLC, is an international...

Private jet flying overhead


Business jets can be financed through a number of traditional and non-traditional mechanisms. Irrespective of the mechanism you choose, to allow you to secure the best financing structure and deal (i.e. one with the lowest down payment, monthly payments and rates), lenders will need to conduct an exhaustive creditworthiness analysis. René Armas Maes elaborates...

From the potential lender’s perspective, they must understand how you as an entity are structured, and the net consolidated cash flow position. Borrowers may typically need to provide three years of audited financial statements and up to 10 years of financial and cash flow projections. Banks and supplier references (among others items) will be requested and thoroughly analyzed.

Not only it is important for them to find out what the net cash inflow is, but also what the prospective borrower’s total debt position is – including interest and principal payments, any upcoming balloon payments, maturity terms and rates, and more.

And as important as it is for potential lenders to conduct a thorough credit and risk analysis of the borrowing entity, it’s paramount for them to evaluate the condition of the aircraft and its intended jurisdiction, especially where pre-owned aircraft are concerned.

The purchase process will include the pre-purchase inspection, which is mandatory for pre-owned assets, followed by closing and filing of the aircraft title in the appropriate international registry. Ultimately, all of these will enable the lender to put together a customized financing solution that matches both theirs’ and your – the borrower’s – interests.

What Aircraft Funding Sources are Available?

There are five common ways to finance an aircraft purchase. These include:

  • Cash;
  • Bank Debt (common in the US);
  • Lessors/Finance Companies;
  • Export Credit Agencies (ECA); and
  • Capital markets.

In addition, business aircraft can be financed using manufacturer support and other non-traditional financing options (such as tax lease, margin loans etc.). Other financing structures and mechanisms employed to finance an aircraft include operating leases where 100% of the asset can be financed, and residual value risk is minimized, transferring instead to the lessor.

Why do Aircraft Financing Conditions Vary?

Depending on the jurisdiction and country, lending conditions may vary and different types of collaterals (based on the status of a client/entity with a bank) may be requested.

As an example, asset-backed (or secured) lending is when a bank loan is backed up by a valuable asset – known as lender collateral – which is placed as a form of insurance against defaulting on the loan.

While a lenders’ conditions can vary, based on the intended country of aircraft registration, lenders will tend to favor jurisdictions that have signed up to the Cape Town Convention as this guarantees the rights of aircraft financiers to repossess an aircraft quickly if necessary.




How Long are Business Aircraft Financed For?

Generally, business aircraft can be financed for up to 10 years, but more typically between 5-7 years. An aircraft make/model with a solid production base and history (including technological updates and upgrades) can command more appetite for financing from lenders than one without. Aircraft obsolescence is major risk for lenders meaning that most prefer newer aircraft.

If you’re considering buying a pre-owned aircraft, most lenders will have certain financing term limitations. For example, if an aircraft is 12 years old the lender might decide to finance it for 2-3 years and not more. Likewise, lenders may not be eager to finance every type of aircraft, including those with high times on the airframe (i.e. more than 5,000 hours).

Older aircraft types and less marketable aircraft might be difficult to find financing for, and are most likely to command a penalty in terms of premium rates and/or shorter financing terms. 

For these aircraft, financers will analyze (among other items) total number of units manufactured and spare parts availability.

An aircraft’s maintenance history is very important as lenders will insist that at least the aircraft’s engines are covered by a respected hourly maintenance cost program. And lenders will generally consider aircraft engine time and favor low hours or mid-time engines.

Finally, and under an operating lease, the lender may look mainly at the number of aircraft manufactured and aircraft type residual values among others to determine the lending conditions and premiums.

Likewise, a shorter amortization schedule and a larger down payment can be expected for operations where heavy aircraft usage is anticipated (such as for a US Part 135 certificate and in fractional ownership operations).

What is a Typical Interest Rate for Business Aircraft Financing?

Depending on jurisdiction, entity/individual credit history, size of down payment, the amount to be financed and the term, the interest rate can vary from 3.5% up to 7% or more. Many lenders offer flexible structures at highly competitive rates including à-la-carte rates (i.e. fixed, floating and hybrid).

Moreover, for credits considered high risk a larger down payment might be required to close a deal and/or be needed to negotiate a better interest rate. By contrast, a medium to low risk credit might command a down payment between 15-18%, whereas a higher credit risk might involve 30% or more.

Unless an all-in rate has been confirmed and negotiated, a lender term sheet interest rate can be seen as purely indicative and calculated according to the credit strength and the Aircraft Sector Understanding (ASU) rate.

Likewise, a rate can be refinanced – an important tool to free up equity. If interest rates are lower, refinancing may optimize cash flow and be a sound cost-effective alternative. And in case a variable rate was chosen for a deal due to solid financial market conditions, financers can help you lock in a better rate through a fixed-rate transaction or swap if financial market instability suddenly arises.

Finally, due diligence and negotiation of the best interest rate (based on one’s credit risk/history, type of collateral guarantees and ability to pay balloon payment(s)) may be the right strategy to maximize cash flow which is the end goal when negotiating a financial deal.


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René Armas Maes

René Armas Maes

Editor, Buyer Strategy & Finance

René Armas Maes, Vice President, Commercial, Jet Link International LLC, is an international aviation consultant and experienced C-Level professional. He has built a successful track record for developing and delivering Business Aviation strategies for Fortune 500 companies, Venture Capital firms, and HNWIs.

René is a regular columnist for Bloomberg (financial), America Economia (business) and a speaker at aviation conferences worldwide.


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