Assessing the debt-to-income ratio for a lot of folks is straightforward. To calculate the DTI, divide all debts by total income from all sources. The higher the income side of that ratio is compared to the debt side, the easier it is to get an aircraft loan.
There are a significant number of would-be aircraft owners whose work, type of business or, controlling interest in ongoing concerns doesn’t provide them a steady, obvious income stream. Real estate brokers, property developers and even restaurateurs all come to mind. In these cases, assets might be available to provide collateral where cash flow is unpredictable.
Furthermore, many small business owners don’t take a salary. Instead, they’ll take a periodic distribution. Their philosophy is they take out of the company only what they need, rather than a salary based on their position’s perceived value in the marketplace. These arrangements along with the unpredictable cashflow mentioned above, bedevil credit underwriters.
That’s because in aviation financing, most aircraft lenders don’t do asset-based loans. Most loans made are based on cash flow. In those cases, the lender may need to abandon the DTI concept and look at the borrower’s ability to meet loan obligations through a "ldebt service coverage" approach.
Distributions (vs. W2 pay) are common practice and acceptable to lenders. However, from a lender’s standpoint, for a person only taking out what they need, by definition, their DTI is 1:1. No lender will be comfortable to lend to somebody based upon that ratio alone.
Businesses or entities either generate revenue, or they have revenue pass through them. Ultimately, a lender needs to understand which of the two the particular entity is. Knowing that helps a lender determine how strong its cash flow is. Without a rough idea of how much additional cash flow or income on the DTI there is to cover, they cannot know what the margin of error is for servicing the proposed debt. Without that knowledge, they cannot pursue a deal.
It may be true that leaving a distribution in the company is a better and smarter financial position, but doing so then places dependence on the company’s ability rather than the individual. What happens if the interest the individual has in the company changes? What if the fortunes of the company itself change? How then will the owner be able to pay the loan?
That’s why lenders need to examine the full global debt service of the borrower, obtain a comprehensive assessment of all the entities in which the potential borrower has a vested interest. They'll also need to understand the legal obligations between borrower and entities.
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