Just as business partners will draft a mutually beneficial partnership agreement, lenders require all parties to agree to the terms of the loan contract. In most cases, agreeing to the loan contract means you qualify to obtain the loan and service the debt according to the lender’s terms. Aircraft lenders use the aircraft as collateral for the loan, and any individual or entity in the chain of aircraft ownership is required to provide a guarantee on the loan. The best way to ensure the loan remains in good standing is to verify all parties qualify.
Qualifying for an aircraft loan requires verification of your financial condition and complete underwriting by the lender. Financial documents such as tax returns, bank statements, and any associated business financials are required for the lender to complete underwriting. Most lenders require that each individual partner qualifies on their own for the full loan amount. With each partner capable of handling the loan individually, a financial hardship for one partner is unlikely to put the loan in jeopardy.
In some cases, a business might be purchasing the airplane, but one partner has no interest in using the aircraft. There may be other situations where one of the partners owns such a small percentage of the entity that will own the aircraft, that they are unwilling to provide a full personal guarantee. In these examples, there may be an option for some lenders to accept a subordination agreement with the silent partner as part of the loan package. Signing a subordination agreement allows the silent partner to help the active partner in acquiring the loan without having to submit financial documents or provide a personal guarantee on the loan.
A subordination agreement establishes that the lender’s claim to the aircraft supersedes that of the silent partner. The priority of debts can become extremely important when a debtor defaults on payments or declares bankruptcy. If the aircraft must be repossessed, or the borrower’s assets must be liquidated to repay outstanding debts, the lender will have signed documentation from all partners confirming the lender’s priority to the aircraft.
Alternatives to all partners guaranteeing an aircraft loan are sometimes available, but having all parties on the loan is the most preferred option.
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