Buying a Jet? Top Industry Asset-Based Loan Tips

Asset-based loans essentially refer to finance that is backed by a particular asset, such as a business jet. They generally do not require a financial statement disclosure, while there is limited, or no, need for a personal or corporate guarantor, according to Keith Hayes, Senior Vice President and National Sales Manager for PNC Aviation Finance.

Instead, the terms of the loan depend on the amount of equity or down payment the buyer puts into the transaction. There are also benefits around the speed of closing the loan, Hayes adds.

There are several alternatives. For example, borrowers could opt for a traditional credit-based loan, though this requires a full financial disclosure and a thorough underwriting process, and can take up to twice as long as an asset-based financing structure, notes Hayes. Another option is an operating lease structure, which offers flexibility in relation to tax benefits and off-balance sheet accounting treatment.

However, asset-based loans have proved popular, and while PNC Aviation Finance offers a range of aviation finance types, including credit-based loans and leasing options, the asset-based loans structure makes up over half its portfolio.

Asset-Based Loans: What’s the Attraction?

Asset-based loans have been more popular than leasing in recent years because of the low interest rate environment, says Brian Foley, one of aviation’s leading analysts. This has made loans more attractive, though he notes “leasing may now start gaining popularity as we enter a higher interest rate environment”.

There are several benefits to the asset-based loans structure for business jet operators, according to Foley. In the US, owners are permitted to make tax reductions for depreciation and interest, he notes.

Additionally, they’re entitled to an increase in the value of the aircraft, if any, while they build equity in the aircraft as their payments are made. Moreover, by securing their business aircraft through the loan, “the borrower can deploy their own capital to higher Return on Investment (ROI) projects than aircraft ownership”.

Still, there are drawbacks to keep in mind, Foley adds. The usefulness of the approach will lessen if the owner is unable to use tax reductions. On top of that, “the lender may set rules, restrictions and requirements relating to the operation of the aircraft”.

Who Qualifies for Asset-Based Loans?

Adam Meredith, president of AOPA Finance, says his company’s experience is that borrowers with very complicated financials – such as those that own multiple business entities – are ideal candidates for asset-backed loans, as there is much less back-and-forth analysis required. 

“With asset-based loans, the underwriters focus on the aircraft and ‘character’ of the borrower, rather than their financial strength,” Meredith explains. “The theory is that if there’s equity in the aircraft (the loan balance is sufficiently less than the aircraft value) and the borrower is of solid character, then in the event of a default you can always sell the plane to cover the loan.”

There could be potential difficulties depending on the aircraft in question, Meredith adds, particularly if it “is difficult to properly assess value and/or predict residual values”.

This stands in contrast to credit or cash flow-based loans, “whereby underwriters are looking at estimated cash flows and liquidity to determine how much the borrower is able to afford”.

The type and age of the aircraft is very important, as well as the usage, Meredith continues. For example, if an operator intends to extensively charter their aircraft (e.g. for more than 50 hours per year), or if the plane is more than 20 years old, asset-based offerings are not typically available, he says.

“Certain other aircraft that are frequently used in commercial operations, have limited sales, or are new to market are also frequently excluded,” Meredith adds.

Meredith notes that banks must analyse the collateral, with borrowers needing to complete an application to allow the lender to study their credit, and personal history. 

“These loan underwriters will heavily scrutinise your past to ensure you’ve made payments in a timely manner and have a solid record of handling your affairs.”

What Size Down Payment is Required?

In the case of an asset-based loan, the industry standard is for a borrower to put down a minimum of 20% as a down payment, says Hayes, adding that some level of personal or corporate guaranty may be required, depending on the level of the down payment.

“If the borrower is willing to put 40% in equity or greater, there could be no guaranty required at all,” he explains. “However, in all cases, a thorough background or ‘know your customer’ review will take place. This provides the financing party with the opportunity to confirm the borrower’s background before moving forward with an asset-based solution.”

Asset-based loans continue to be popular because they enable flexibility in the finance process, Hayes suggests. Since the beginning of the Covid-19 pandemic, interest in private air travel has boomed, leading to an increase in virtually every aspect of PNC Aviation Finance’s business, and the industry as a whole, including record numbers of first-time aircraft buyers.

“Due to the nature of asset-based loans, this financing structure really opens the door for more buyers and allows them to move quickly, which is incredibly important in today’s market,” Hayes suggests. He doesn’t see many drawbacks to the asset-based product, though he does note that “the interest rate for the loan will be somewhat higher to cover the additional financial risk being taken on by the bank”.

It’s also important that borrowers are aware that if they wish to borrow more than 80%, the asset-based loan structure will not be available. Nevertheless, the approach offers speed, simplicity and privacy, he says.

When Time is of the Essence...

“Since an asset-backed loan does not require personal or corporate financial information to be disclosed, some high-net-worth individuals or privately held companies find it to be an appealing option,” Hayes says. “With inventory at an all-time low, time is of the essence when acquiring an aircraft.

“This is why it’s critical to not only choose your financial partner carefully, but also your other third-party advisors (such as attorneys, brokers, etc.). Having trusted advisors that specialize in business aircraft and have a vast knowledge of potential pitfalls will aid in successfully navigating this process,” he advises.

If a business jet operator has the available resources, they should use cash to secure ownership of the aircraft, and then opt for financing later, Foley suggests. “Aircraft sellers in this tight market don’t want to wait and see whether the buyer’s lender approves the loan.”

Read more articles on Finance for Business Aviation for more financing tips and loans