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Aircraft Banking Centers, Inc.
P.O. Box 516
Pineland, FL 33945
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(800) 814-6682
(866) 359 - 6692
FAX (770) 305-9309
Determining the best option(s) for funding an aircraft purchase has always been a dilemma for buyers. Should you purchase it via traditional term financing, use your cash reserves, borrow against your stock portfolio, or enter into a lease? Each of these options will be reviewed below to assist in determining the best solution to fit your individual needs.
There are numerous reputable industry lenders offering traditional long term fixed and variable rate programs for aircraft which include direct lenders, finance companies, and aircraft loan brokers. It is highly suggested that you deal only with those lenders who are members of either/or the Professional Aircraft Lenders Association (PALA.Aero) or National Aircraft Finance Association (NAFA.Aero). These lenders are established professionals and can offer you expert advice and service. It is not recommended that you borrow money from your "local" bank who presently may have open business lines of credit established with you. Often, once you acquire a loan for an aircraft from them, they reduce your credit lines by as much, also making it harder or impossible to increase those lines at a later date. Additionally, lenders who are not familiar with aircraft documentation, FAA regulations, and the International Registry requirements, often create major hassles at closing. Aircraft finance companies and professional loan brokers are generally your best bet as they offer rates and terms through many in-direct banks, not accessible to you directly.
With today's banking environment, lenders all generally require a minimum of ten percent down off the sales price or appraised value, whichever is less. Terms are based on the age of the aircraft with many lenders and fifteen to twenty years is the norm. As of September 2008, Interest rate options include fixed rates for term, balloon programs, and variable rate options usually based on 30 day LIBOR rates plus anywhere from 125 to 250 basis points adjusted monthly (approx. 5% to 5.75%). Fixed rates for transactions over $500,000 range between 6.25% to 7.25% based on down payment, credit worthiness and strength, collateral, and selected program options. The benefits of traditional financing include your ability to build equity and in most cases, to take advantage of tax incentives, depreciation, and the interest paid may be tax deductible. Additionally, you may sell the aircraft without restrictions. In today's rising interest rate scenario, a fixed rate may be more desirable if you intend on keeping the aircraft longer than two years.
If you are in a financial position to pay cash for an aircraft, the obvious benefits are the huge interest savings, simple closing process (always use a reputable title & escrow company), and 100% equity position in collateral. With current rates as low as they are, it might make more sense to leave your cash in current investments as "liquidity is king" in today's changing banking world, especially if you intent to borrow money for other things later.
The only benefit from this option is you'll get the lowest interest rate(s) with little or no down payment required. In most cases, lenders will require you to move all or the majority of your portfolio to their investment bank for collateral and investment management. This solution is offered to high net worth individuals only and can be beneficial to both parties as long as they manage your portfolio per your expectations. If you want to terminate the relationship, you'll have penalties in most cases and will have to pay off the aircraft prior to the investment bank releasing your portfolio.
There are several aircraft leasing options but very few lenders who offer them. Aircraft leasing will generally cost you more in monthly payments and those payments are based on required down payment, lease term, collateral residual values lease rates. In the event values where miscalculated by lessor or market conditions change as in today's environment, you may have to come up with a significant shortfall in cash at lease termination. It is harder or contractually not allowed to terminate a lease early making it financially difficult to get out of an undesirable aircraft or situation. Additionally, you may only expense the lease payment and there is no depreciation allowance in most contracts. The benefits of leasing include, possible off balance sheet structuring, no hassles selling aircraft after full lease termination (subject to market considerations), and in some cases, minimal down payment requirements.
It is highly suggested that you speak to several industry leading lenders and carefully consider which funding option best meets your tax, cash flow, risk tolerance, interest rate and term desires and aircraft use requirements.
