Many buyers instinctively want to pay the full purchase price in cash when purchasing an aircraft. While this may seem like the simplest and most expedient option, there are several compelling reasons to consider financing your aircraft purchase instead of liquidating investments to pay all cash.
In this article, we will explore ten key reasons financing an aircraft can be a smart financial move and how working with experienced aviation finance professionals can help you navigate the process with confidence.
1. Keep your cash invested
One of the most significant advantages of financing an aircraft is the ability to keep your cash invested. Selling stocks, cashing in investments and depleting cash reserves can come with big opportunity costs and tax implications. Even if you have enough liquidity to buy an aircraft outright, that money could, over time, likely generate far greater returns if you keep it invested in the market or your business.
Discussing your plans with your investment advisor first may help you understand exactly what opportunities you may be foregoing and the consequences associated with divesting. With interest rates spanning the 6% to 7% range, still comparatively low from a historical perspective, the cost of financing will often be less than the expected return you can earn on that cash if invested wisely.
Additionally, financing can free up that capital for other investments or business opportunities. This can be advantageous for business owners who need to maintain liquidity to seize new opportunities or manage possible future cash flow gaps effectively. Keeping your capital invested in your business or other high-return investments can often yield better financial outcomes than tying it up in an aircraft.
2. Preserve liquidity for necessary or unexpected ownership costs
Buying an aircraft involves many more expenses beyond the purchase price, including taxes, registration fees, hangar costs, maintenance, insurance, crewing and more. Paying all cash upfront can leave you cash-strapped when these additional ownership costs arise.
For example, investing in a comprehensive aircraft maintenance/engine program can provide significant benefits when owning a turbine aircraft. These programs are prepaid hourly services that help make sure your aircraft remains in top condition, which is important for maintaining its value. By keeping the engine hours at a "zero level" through regular maintenance, you can maximize the appraisal value of your aircraft when it comes time to sell.
Financing preserves liquidity, so you have cash on hand for this as well as any future upgrades or unforeseen issues. This financial flexibility is important, especially in the aviation industry, where unexpected costs can be significant.
3. Preserve liquidity for risk mitigation
Consider how cash on hand can help cover unexpected expenses outside of the aviation world. Individuals should think about how they will deploy their cash reserves if a potential issue arises that might deplete their remaining liquidity. For example, a reversal of fortune related to changing economic circumstances or paying for an unexpected family health event that could significantly change your financial situation.
Financing up-front could potentially avert the need to sell the aircraft or obtain cash-out financing in order to raise funds to address unforeseen events down the road. Note that obtaining cash-out financing after the fact is not guaranteed due to many factors, such as collateral depreciation. Furthermore, there is rate risk associated with cash-out financing at a future date down the road. Last, economic downturns may impact your financial capacity and future ability to obtain cash-out financing.
Business owners may need to maintain cash reserves to satisfy liquidity covenants and fulfill any prior financing commitments, such as lines of credit or long-term financing obligations. When considering the interest rate offered to your business, it’s important to recognize that having a cash cushion serves as a buffer to cover these potential future requirements.
4. Tax advantages of financing
The interest on an aircraft loan is often a tax-deductible expense, and financing lets you take advantage of not only depreciation deductions but also interest expenses, which offset income.
Under current bonus depreciation rules, you may deduct for eligible aircraft, up to 60% of the purchase price in the first year, which is further enhanced by the addition of those interest expenses. For business aircraft, these benefits can be substantial, making financing an attractive option from a tax planning perspective.
5. Easier to resell
Keeping your cash invested provides greater flexibility if you need to resell the financed aircraft. You won’t be pressured to liquidate the aircraft quickly, often at a discount, to recoup the capital invested in the aircraft. This flexibility can be beneficial in a volatile market where aircraft values can fluctuate.
6. Easier than you think
Many buyers dread the paperwork and hassle of financing an aircraft. However, working with an experienced aviation lender, like the professionals at the National Aircraft Finance Association (NAFA), makes the process easier. From brokers, lenders, accountants and more, NAFA members understand aircraft purchases and can walk you through the process. This knowledge can streamline the acquisition process, especially making it easier and less stressful for first-time buyers.
7. Manageable monthly payments
Aircraft financing typically offers manageable monthly payments, which can be easier to handle than a large lump-sum payment. This lets you spread the cost of the aircraft over time, making it more affordable and less of a financial burden. Fixed interest rates on loans can also provide predictability in your financial planning.
8. Potential for better aircraft
Financing can enable you to leverage your cash to buy a better aircraft than you could afford with cash. A larger down payment often translates to better interest rates and terms. This can mean better performance, newer technology and greater comfort, which can enhance your flying experience and potentially increase the aircraft’s desirability in a future resale environment. By spreading the cost over time, you can access higher-quality aircraft that better meet your mission.
9. Avoid unwarranted tax consequences
As broadly discussed above, paying cash for an aircraft often requires liquidating investments, which can trigger capital gains taxes and reduce your overall investment portfolio. Financing lets you avoid these tax implications and keep your investment portfolio intact, continuing to grow and generate returns. This can be important for individuals nearing retirement or those with significant investment portfolios.
10. Professional guidance and support
Working with specialized aviation finance professionals can provide valuable guidance and support throughout the financing process. These experts understand the unique parts of aircraft financing and can help you navigate the complexities, ensuring you get the best terms and conditions for your loan. This professional support can make the financing process smoother and more efficient.
Lenders have developed standardized compliance checklists and processes to ensure judicious steps are taken before the sale is finalized. These steps include but are not limited to confirming the aircraft's airworthiness is certified, verifying that annual inspections have been completed, review of Appraisal, pre-buy inspections, title searches and escrow instructions related to the sale. Professionals will ensure these forms and procedures are properly completed throughout the process. By following these established protocols, you can take flight in a timely manner while remaining compliant with all legal requirements.
Conclusion
While paying cash for an aircraft may seem like the simplest option, financing offers many advantages that can make it a smarter financial decision. From preserving liquidity and taking advantage of tax benefits to keeping your cash invested and maintaining financial flexibility to pay for aircraft expenses and taxes, financing can provide significant benefits for aircraft buyers.
By working with experienced aviation finance professionals, like NAFA members, you can navigate the financing process with confidence and make your dream of aircraft ownership a reality.
The best financing choice depends on your unique financial situation, tax status, liquidity needs and aircraft usage. Consult your financial advisor, but for many aircraft buyers, financing is the smartest way to make airplane ownership a reality.
About Keith Graham:
Keith Graham is Senior Vice President at Salem Five Bank in Georgetown, Massachusetts, where he has served as Manager of the Aviation Finance Division for almost 20 years. Keith has over 35 years as a licensed pilot and aviation financial professional.
About NAFA:
The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for over 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members on the most up-to-date industry trends and best practices. Government legislation, market influences, and industry insights allow member companies to provide the highest quality services the industry has to offer.
Disclaimer:
The information given in this article is for general informational purposes only and is not professional financial, tax or legal advice. While we strive to provide accurate and updated information, it is not a substitute for professional advice tailored to your specific financial situation. Before deciding on the purchase or financing or an aircraft, we strongly recommend consulting with a qualified financial advisor, tax professional or legal expert who can provide guidance based on your individual circumstances. Neither the author nor the publisher assumes any responsibility or liability for any financial decisions made based on the information in this article.