February 28, 2017  ·  Pascal Bachmann

Financing Your Business Jet Purchase

The business aviation industry today is showing continued signs of growth, and improved business conditions are creating a favorable environment for individuals and corporations who may have postponed such transactions during the economic downturn to again consider making the high-value investment of procuring an aircraft.

As with any purchase, paying cash is the easiest way to close a transaction. Another option may be for owners to complete an aircraft trade-in transaction which can free up capital so the owner can move more quickly toward acquiring a model more suitable for their changing needs. Some experts, however, advise that even if an individual or corporation has enough cash available or an asset they can trade in, it may make more financial sense in certain instances to either finance or lease the aircraft.

Many aircraft financing institutions focus on the ability of the client to repay the financing. It does not mean they do not care about the aircraft itself, but rather focus on ensuring the best terms that will yield the most investment return. For buyers, their process begins with “buying right.” In other words, buyers should be responsible and do their due diligence during the financing selection process to ensure their terms reflect a reasonable price for the chosen aircraft. Generally, the newer the aircraft the more financing options there are. Many financing companies will be ready to bankroll an aircraft up to 10 years; some may even go up to 25.

Most lenders will insist on having a reputable management company take care of the aircraft. This is another way to preserve the value of the aircraft by making sure it is well looked after and that the documentation is impeccable. Lenders may also want the aircraft to be registered in jurisdictions that would make it possible for them to claim the asset in case of default.

There are caveats to consider when going the loan route, however. It is important to note that when establishing a loan for an aircraft like other high-value purchases, most lenders will require a significant penalty or breakage fee for early payoff (usually within the first few years).

If you want to lease the aircraft instead of taking out a loan for purchase, this route may afford you the ability to take advantage of substantial tax benefits. This is especially true for public corporations because leasing offers them the ability to not report the asset immediately on the company’s balance sheet. Financers can use the tax deductions against their leasing income. Corporations obtain this benefit in the form of lower financing costs. In addition, the bank assumes the depreciation risk—not the owner—over the lease term.

In all cases, keep these three key elements in mind during the financing process to help avoid surprises or delays:

  • Credit-worthy – If the borrower is deemed less credit-worthy, backing from a third party or parties will be needed.
  • Accurate Appraisal – It is paramount to assess the most appropriate value of the aircraft to be purchased. Lenders want to be sure that you do not pay too much for it, and to an extent will try to make sure that the value remains as stable as possible.
  • Title – A title search is executed on the desired aircraft to ensure nothing is owed and it is cleared for purchase. Buyers also often take out an insurance policy to protect their transaction against any title issues that may not immediately be apparent.

As with any large capital expenditure, financing an aircraft will be complex and require numerous milestones that will need to be executed. It pays off to surround yourself with a team of trusted advisors to help you navigate financing, and the entire aircraft buying process.

Geneva, Switzerland

+41 79 200 5633