Aviation Financing Options:
Finance your Aircraft with Easy Repayment Options
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The US is one of the leading markets for the aviation industry. As per statistics, there are around 350,000 small aircrafts in the world with more than 50% being in the United States. While most of these planes are assumed to be owned by private pilots and air charter companies, we cannot overlook the fact that several private organizations rely on air travel to stay agile and competitive.
While the need for aircrafts is evident, selecting the right aircraft financing option can be quite overwhelming. Businesses may need to deal with huge upfront down payment costs, unfavorable interest rates, and navigate through burdensome loan repayment terms. Many times, aviation businesses even look for customized financing solutions that offer better terms than traditional loans.
Here, we have discussed several aviation financing options in detail, explaining how each options works and can help you with aircraft purchase.
What is Aviation Financing?
Aircrafts are costly. Even small aircrafts, like single-engine airplanes can have a purchase price of $15,000-$100,000 and multi-engine cost even more. Paying such high upfront costs to obtain an aircraft can significantly drain cash reserves. Arranging for an entire fleet of private aircrafts for charter business can be even more daunting. Aviation financing provides a convenient alternative to this.
Instead of paying the full price, businesses can explore multiple aviation financing options and select the one that best matches their business needs. They can get quotations from multiple lenders to secure competitive rates or reach out to Original Equipment Manufacturers (OEMs) to get an aircraft financing deal.
Even large airlines all over the globe strategically invest in commercial aircraft loans to purchase and maintain aircrafts. With the amortization process lasting many years, loan repayment does not hinder cashflow.
Which Type of Aircrafts Can I Finance with Aviation Financing?
After identifying their business requirements, businesses can explore the aircrafts they need to buy. Usually, they can purchase all types of aircrafts they want under aviation financing. These can include both new and preloved aircrafts.
Benefits of Aviation Financing
Strategic investment in aviation financing can help charter companies expand their fleet, operate on new air routes, enter new markets, and boost revenue generation. Likewise, it can help private organizations accomplish several goals. With private jets, private organizations can get secure space for transporting confidential files and cover multiple cities in a single day. While these are some clear aftermaths of how an aviation loan can help businesses grow, the loan itself has several benefits over traditional purchase methods:
01 Potential Tax Savings
For business owners, investing in a corporate aircraft through loan not only helps cover air travel needs, but also in tax savings. The interest amount paid on aviation financing can be counted as a business expense and registered as a deductible in tax returns. This lowers the overall tax liability of the business. It is best to always consult with a tax professional.
02 Higher Loan-to-Value
Aviation loans are mostly asset-based loans, where the asset itself serves as the collateral and safeguards the entire loan amount. Because of this, business owners can become eligible for a higher loan-to-value (LTV) ratio, which basically means how much of the aircraft cost can be covered under the loan.
03 Faster Access to High-End Models
For air charter business, offering high-end models that are absolute luxury can be a game changer. However, such aircrafts can be very costly. They are also often high-in-demand, which further inflates their costs. Aviation financing options helps procure such aircrafts with lower financial strain.
04 Flexible Financing Structure
Aviation financing options aren't rigid. Businesses can select the option they feel is the best for their requirements. Some options even allow to negotiate terms like interest rate, loan duration, and downpayment. Business owners can use loan calculators to easily identify the terms that favor them the most.
05 Fixed-Floating Interest Rates
Corporate organizations often have their own business experts and accountants who can predict market conditions. If your business falls within this category, you can opt for floating rates as well. These rates fall and rise with the market and can help you save thousands in interest because of predictable fluctuations. In contrast, for businesses that want more predictable monthly payments, fixed interest rates can be a better option.
06 Business Assets Remain Protected
As the aircraft purchased itself serves as the collateral, it safeguards the entire loan amount. In case of a default, the business assets of the borrower remain protected. To recover any damages, the lender seizes the aircraft and sells/auctions it.
07 Refinancing Option is Always Available
To avoid opening another loan and bear additional interest rates and repayment troubles, business owners can consolidate their existing debts into a new loan. They can refinance existing aviation loans and secure aircraft funding at preferable interest rates.
Types of Financing Options Used for Aviation
As said above, aviation can access multiple financing options to purchase a new aircraft at reasonable monthly payment. For first-time aircraft owners, the interest rates may be lower.
SBA Loan Programs
The U.S. Small Business Administration is a federal authority that helps small businesses with its various financing requirements. While it does not offer the loan, it connects the business with suitable non-profit intermediary, often known as a certified Community Development Financial Institution (CDFI). A few popular SBA loan programs that can be used as easy aircraft financing options are:
- SBA 504 Loans: For single engine aircrafts, businesses can look forward to take SBA 504 loans. These loan options have a max loan amount of $50,000 and don't require any collateral.
- SBA 7(a) Loans: These are larger loans with maximum amount up to $5 million and can be used to purchase multi-engine aircrafts or set up an entire fleet of planes. Usually, the underwriting criteria for SBA 7(a) loans is stricter, and these may also require a collateral.
In both aforementioned loan programs, the SBA guarantees a part of the loan.
Term Loans
Several businesses may find traditional term loans as a reliable option for aviation lending. The loan amount in these loans is flexible, and can go up to millions of dollars, depending on the creditworthiness and loan repayment capability of the business. The business owner can also negotiate terms like loan tenure, collateral value, alternate collaterals, downpayment, interest rates, and more.
In term loans, business owners are responsible to find their guarantors and co-signers. The application process may require proper evaluation and decision making can be longer than in other loan options.can be longer than in other loan options.
Equipment Financing
Depending on your business model, aircrafts can be an important equipment. In such situations, business owners can opt for equipment financing as well. The loan amount in these options varies for each lender. However, as the aircraft itself secures the loan, businesses may expect to receive lower interest rates with convenient repayment terms. For newer businesses, equipment financing options can be highly suitable. These cover immediate financing needs without depleting monthly profit margins.
OEM-led Financing Options
Several original equipment manufacturers (OEMs) also offer financing options directly or with subsidiaries. All major airline manufacturing companies, like Boeing and Airbus offer financing options with various partners. For purchasing a single aircraft, these options are highly lucrative. However, these options may not provide much flexibility or scope of negotiation to borrowers, and they may have to oblige to rigid interest rate terms or downpayment requirements.
Business Line of Credit
The business line of credit is an alternative funding option in which lenders prequalify businesses for a fixed amount of loan, or credit line. Business owners can withdraw as much amount they require from this credit line and only need to pay interest on the amount withdrawn. As business line of credit works on the revolving credit principle, owners can replenish their credit line with monthly payments and borrow again to fulfill other business needs.
Eligibility Criteria for Easy Aircraft Financing
Each lender decides their own eligibility criteria. Some may allow some flexibility in the criteria, while others may follow more rigid terms. For general aviation financing, borrowers can match their credit profile with the following criteria:
Credit Score
High credit score improves your chances of securing aviation financing with lower interest rates. Lenders usually consider a score between 630-749 as good, 749-799 as very good, and 800-849 as excellent. In case of any discrepancies in the credit score, businesses should immediately report them to the credit bureau.
Age and Type of Aircraft
New aircrafts have a higher resell value and can secure a very good portion of the loan principle. Thus, they often attract lower rates. Likewise, commercial planes that can be used for revenue generation may help secure better interest rates over private jets for business travel.
Income Stability
Lenders may ask for your financial statements, such as balance sheets, tax returns, and how you aim to arrange funds for repayment. For new business owners, lenders may consider personal income stability.
Debt-to-Income Ratio
Existing debts often impact the approval of new debts. Consider consolidating existing debts under a single loan, paying them off, or opting for a small loan amount.
Down payment
Making a downpayment makes the loan a safer investment for lenders. Not only does higher down payment ensures a faster and favorable decision, but it can also help you secure lower interest rates.
Guarantor or Co-Signer
Likewise, having a guarantor or co-signer to share your repayment risk may help you get aviation financing with suitable repayment terms.
Key Considerations Before Choosing Aviation Financing
While several aviation financing options exist, business owners must evaluate their requirements before moving forward with a specific option. Likewise, they should consult multiple lenders and loan advisors to select a loan program that matches their business needs. Along with the interest rates, business owners should evaluate terms like Annual Percentage Rate (APR), loan origination fee, underwriting costs, foreclosure penalties, and pre-payment penalties to make a well-informed decision.
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FAQs about Aviation Financing
1. What is aviation financing?
Aviation financing refers to all those financing and loan options with which pilots and charter companies secure funds to purchase aircrafts at convenient repayment terms.
2. What is the interest rate for aircraft financing?
The interest rate is not fixed and may vary for each lender. Consult a loan expert today to find interest rates eligible to you.
3. Are there any government backed programs to finance aircrafts?
The U.S. Small Business Administration (SBA) offers federal backed loan programs that business owners can use to finance aircrafts. These options include SBA 504 loans, 7(a) loans, and more. Note that the SBA itself does not offer loans. It connects borrowers with certified non-profit intermediaries and only guarantees the loan.
4. What are the different types of aircrafts I can finance with aviation financing?
With the help of aviation financing, pilots and charter companies can purchase various types of aircrafts including preloved crafts, new crafts, private jets, heavy jets, turboprops, vintage aircrafts, and more.
5. What is the loan tenure in aviation financing?
There is not fixed loan tenure in aviation financing. The actual tenure depends on your selected option and for an estimate, can vary.
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