NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses asset-based loans.
Here are five cases for choosing an asset-based loan over a credit-based one:
1. Individuals with complicated financials. Aviation lenders must be able to clearly see the sources and timing of cash flow to understand a borrower’s debt service side of the equation in a typical credit-based loan. Having revenue streams from multiple assets often doesn’t provide such a clear understanding. A person possessing multiple assets, i.e. businesses generating revenue, might find asset-based loans a good choice.
For example, individuals with real estate holdings usually hold them in multiple entities, complicating matters from a lender’s viewpoint. Car dealers are another example. Regardless of how well-established or profitable a car dealer is in real life, the nature of that business generally has them highly leveraged. On paper, to a bank they look like they’re carrying a lot of debt. Both examples tend to make a lot of banks hesitant to issue credit-based loans.
2. Individuals who derive income from multiple businesses of which they may have minority or partial ownership. Conventional aircraft financers tend to require those businesses as a guarantor on the loan. As a partial owner, you may not be able to comply with that request.
3. Other cases include instances where a person cannot provide business recourse. An asset-based loan typically isn’t going to require business recourse.
4. Another example would be serial entrepreneurs, or mezzanine-type financiers, who generate revenue in an uneven fashion. In other words, year-to-year their income may look sporadic, but over a three- or five-year period it has a consistent arc. Because a project has a three-year timeline, say, the amount of debt carried in the first two years may be high, but the third year could be profitable. If lenders are looking at financials a year at a time, they would reject the financials, so an asset-based loan is your best bet.
5. A fifth example involves people with a complicated tax and estate planning structure whose income might derive from trusts. Retired people can fall into this category too. If you don’t have traditional cash flow coming through, that’s going to be problematic. Hence it’s worth it to consider an asset-based loan.
Last of all, asset-based loans can be done generally more quickly because lenders won’t require a full financial audit. Their concerns center around whether you’ve sued or been sued by anybody, if you have a prison record, or if you have other anomalies that might surface.
This article was originally published by AOPA Finance on March 19, 2021.
