How Much Cash Do I Really Need – Aviation Finance
Figuring out how much money a potential borrower needs to finance an airplane isn’t as easy as with auto financing. When it comes to aircraft financing, it is best to think of aircraft loans as personalized transactions, based on various factors that influence cash reserve requirements.
These factors include: how much money is borrowed? How does this number relate to a person’s overall net worth? What is the person’s financial “lifestyle”? How complex is the aircraft? What is the remaining useful life of its engine (s)? And what is the loan to value ratio?
In an ideal transaction, a lender may only need enough cash to meet the down payment. On the other hand, the lender can ask the borrower to provide proof of liquidity to cover 24 months of overall cash flow. For example, a business owner wants to purchase a complex, high-performance, aged piston twin with freshly overhauled engines. He has personal and business debts for which he is responsible totaling $ 10,000 per month. Depending on their other financial obligations, the lender may require the business owner to have up to $ 240,000 on hand.
That same business owner might wonder if the cash from the business in which he has an interest can be used to meet the cash reserve requirements for the loan. Not without a guarantee from this company.
Other similar situations include:
- A person whose cash is held jointly with their spouse, but who applies for a loan without the spouse. Some lenders might only consider half of these assets.
- Assets held in trust when the trust is legally unable to guarantee a loan will not be considered.
Sometimes the defining questions are closely related. For example, someone buying a turboprop is probably looking for a larger loan than someone looking to finance a single fixed gear piston engine. In this case, the size of the loan, the loan-to-value and the complexity of a turboprop aircraft will indicate a need for greater free cash reserves.
How about someone living in a $ 120,000 fully paid house versus someone living in a $ 5 million house with pretty much debt, both looking to buy a ten year old Cirrus SR / 22? What might their individual cash reserve requirements look like? If the homeowner with 100% equity has sporadic income, the lender may need more resources than the high-debt homeowner who has a predictable and consistent monthly income stream.
And let’s be clear: “Cash” means liquid assets such as hard currency or marketable securities in your name, or on behalf of borrowers and / or guarantors. In some situations, retirement accounts can also be considered liquid. “Cash” does not mean Bitcoin or other cryptocurrencies, furs, Rolexes, vintage cars, baseball cards or other memorabilia.
It can all seem quite intimidating. But a conversation with an AOPA Aviation Finance (AAF) advisor can help build confidence. Our assessment of your finances will give you a clear understanding of the amount of cash reserve a lender may require you to have. If this is your first time buying an aircraft, we know you’ve done a lot of research. We fill in the gaps and simplify the nuances. For people moving from an unpressurized piston plane to a turboprop, the AAF can clarify the much larger reserve and cash flow needs of turbine ownership.
Regardless of the type of aircraft, an aircraft with engines closer to overhaul will increase cash flow requirements compared to an aircraft with freshly overhauled engines.
An analysis of your debt ratio will give you a reasonable idea of how much cash a lender will expect you to have up front. If this ratio is low, the liquidity requirements will likely be less stringent than those of someone with a higher ratio.
Advantageous rates. Excellent terms. Helpful and responsive representatives. Three good reasons to turn AOPA Aviation Finance when you buy an airplane. If you need a reliable source of funding with people who are on your side, just call 800.62.PLANE (75263) or click here to request a quote.