Common Reasons Loans Stall Out—and How to Keep Your Deal on Track

Part 1 of a 2-Part Series on Smoother Aircraft Financing

An aircraft loan may stall out if there are problems in any of these common areas: documentation, ownership structure, inspections, and delivery. Let’s start with documentation.

Clean and clear documents protect you as the borrower, as well as the lender. They provide assurance for the lender to comfortably invest in your aircraft through the loan. Clean paperwork clearly indicates what the collateral is and that it is appropriately registered with applicable registration authorities.

The documents also clarify who the borrower is; who the guarantors are; where the cash to own, operate, and maintain the aircraft will come from; and how the ownership will be structured. Proper documentation reduces a bank’s exposure to risk and your exposure to potential fraud. Documentation includes the application, tax returns, personal financial information, business financials, bank and investment statements, LLC or other business formation documents, as well as aircraft registration documents.

One of the major challenges we often see is when lenders are required to rely primarily on what is reported as taxable income to the government. Income taxes are often one of the worst ways to gauge somebody’s real income. That’s because U.S. tax laws allow for income reporting advantages, under specific circumstances, which could substantially reduce your income on paper.

Those advantages can become disadvantages when applying for an aircraft loan. Those same tax breaks that reduce your taxable income can make you or your company look like there isn’t enough income to afford an aircraft loan. For this reason, simply providing your tax returns may not be enough. You may need to work closely with your CPA, CFO, or Controller to provide documentation that will clearly outline to the lender your positive cash flows and profitability.  For those with sophisticated financial structures, gathering this documentation often becomes a team effort, not something easily delegated.

It’s best to have a conversation with AOPA Finance to make sure you are ahead of the curve in preparing your financial documentation. Typically, that documentation must be fresh—between 30 and 90 days old.

Another documentation requirement, particularly for jets and many turboprops, is registering with the International Registry, also known as the Cape Town Treaty. The treaty, implemented post-9/11, was intended to standardize transactions involving movable property. It created international standards for registration of contracts of sale, liens, leases, and conditional sales contracts. It also established legal remedies for default in financing agreements, including repossession, and laid out the impact of states’ bankruptcy laws on movable property, which includes aircraft and aircraft engines. A delay in listing an airplane in the International Registry or compliance with it can stall the closing process.

In Part Two, we’ll look at two more areas where aircraft financing can hit unexpected delays—ownership structure and the inspection and delivery process—and how planning ahead can help keep your purchase moving forward. Stay tuned.

Great advice. Great rates. Helpful and responsive reps you can trust. Three good reasons to turn to AOPA Aviation Finance when you are buying or refinancing an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (800.627.5263), or click here to request a quote.