Finance: Cash on hand

Determining how much cash a potential borrower needs on hand to finance an airplane is not as cut and dried as it is with automobile financing. Aircraft loans are based on a variety of factors that influence cash reserve requirements. How much money is being borrowed? How does that figure relate to one’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 require only enough cash on hand to satisfy the down payment. In contrast, the lender may ask the borrower to provide evidence of liquidity to cover 24 months of global cash flow. For instance, a business owner wants to purchase an aging, high-performance, complex piston twin with freshly overhauled engines. She has personal and business debt for which she’s responsible that totals $10,000 monthly. Depending upon her other financial obligations, the lender might require the business owner to have as much as $240,000 on hand.

That same business owner might wonder if the liquid assets of the business in which she has a stake can be used to satisfy the cash reserve requirements for the loan. Not without a guarantee from that business.

Similar situations include:

1. An individual whose liquid assets are held jointly with his spouse, but who is applying for a loan without the spouse. Some lenders might only consider half of those assets.

2. Assets held in trust where the trust is legally incapable of guaranteeing a loan will not be considered.

Sometimes determining questions are intertwined. For example, the size of the loan, the loan-to-value ratio, and the complexity of a turboprop aircraft will indicate a need for greater on-hand cash reserves than for a loan for a single-engine, fixed-gear piston airplane.

How about a person living in a $120,000 home that’s fully paid for versus one living in a $5 million home that’s fairly well-leveraged, both seeking to buy a 10-year-old Cirrus SR22? If the homeowner with 100 percent equity has sporadic income, the lender may require more on hand than the highly leveraged homeowner who has a predictable, consistent monthly income stream.

Regardless of the aircraft type, an aircraft with engines close to overhaul will increase cash requirements compared to an aircraft with freshly overhauled ones.

Let’s be clear: “Cash” means liquid assets such as hard currency or marketable securities in your name, or in the name of the borrowers and/or guarantors. In certain situations, retirement accounts could be considered liquid as well. “Cash” does not mean bitcoin or other cryptocurrencies, furs, Rolexes, collectible cars, baseball cards, or other memorabilia.

All of this may seem pretty daunting. But a conversation with an AOPA Aviation Finance advisor can help inspire confidence. Our assessment of your finances will give you a good understanding of how much in cash reserves a lender might require you to have. If you’re buying your first aircraft, we know you’ve done a lot of research. We fill in the gaps and simplify the nuances.

A discussion of your debt-to-income ratio will provide a reasonable idea of how much cash on hand a lender will expect you to have initially. If that ratio is on the low side, then the liquidity requirements will most likely be less stringent than those for a person with a higher ratio.

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