Question of the Month: How Can We Finance Our Next Club Aircraft?

Happy January 2024.  I hope all is well and that most of the country has dug itself out from the nationwide storms.  We had “a few inches” (British understatement) of snow here in the high desert of Central Oregon, but, hey, it’s…♪♪wintertime, and the skiin’ is easy♪♪…

This edition of Club Connector was prompted by the unusually high number of calls from flying clubs late last year on the topic of aircraft acquisition and financing.  My colleague, Steve Schapiro, spoke to some of these clubs—you can find his article “DIY: Self-Financing Can Be a Useful Tool for Clubs Looking to Acquire or Upgrade Aircraft” in this month’s Club Spotlight.  One of our favorite clubs close to AOPA HQ, the TSS Flying Club, has been doing self-financing for years, so they are a good source of advice for anyone thinking about going down that path—again, see Club Spotlight for more details.

Interestingly, one such club was thinking of financing a Socata TB-9 (Tampico), and I had recently been talking with two other nascent clubs who were thinking about the TB-9 as an option for their newly forming clubs. So, we feature the Tampico in this month’s Aircraft Spotlight.  What an interesting alternative to C172s and PA-28s for flying clubs!  More on this intriguing craft can be found here, and here.

In this QoM, we’ll take a look at the options available to flying clubs when thinking about acquiring a new-to-them aircraft.  I’ve written previously about how to introduce a new steed to your stable—okay, hangar—(QoM Feb 2021, QoM Jan 2021, Aug 2019, July 2019), but here I’ll focus on…the money.

Traditional Financing

I’ll call this traditional since this is the way most people think about financing the acquisition of something expensive, in other words, the “traditional” bank loan.  Basically, you find a financial institution that will work with you and who will “give you” the money to buy your aircraft.  Of course, there is not much give here…it is actually a lot of take!  Lending money on the one hand, and borrowing money on the other, is probably second on the list of oldest professions, so it has been around for a while, and make no mistake, it is a serious business.  Your club, the aircraft and possibly you—an individual—are all components of risk that need to be assessed before you are deemed worthy of receiving a loan.  There is very little maneuvering room here, and even less opportunity for negotiation.  Based on the parameters of your case, the offer of a loan will (or will not) be made and will include terms, conditions, and requirements.  This may include, for example:

  • Amount loaned/borrowed (the principal)
  • Down payment (up front portion of the loan amount)
  • Interest rate (percentage on a quarterly, semiannual, or annual basis)
  • Term or period of the loan (by when it must be paid off)
  • Payments (to cover interest first and second, paying down the principal)
  • The collateral which secures the loan (what will be repossessed if you fail to make payments)
  • Personal guarantors (individuals who pledge to take responsibility for the loan if the original applicant defaults)

The ability to secure a loan very much depends on the amount to be financed.  We’ve heard of flying clubs not being about the get a loan for a relatively inexpensive aircraft, and also from clubs who can’t get money to purchase a very expensive aircraft.  In the first case, it appears that it just isn’t worth the trouble to create all the paperwork for a small loan amount, as the administration is pretty much the same for all sizes of loan.  In the second case, the club may not be able to persuade the loan agent that it has the financial wherewithal (in the bank) and sufficient recurring cash flows (from monthly dues) for the down payment and money repayments.  Given today’s high interest rates, a club will very likely have to increases monthly dues by a significant amount, which may then price some members out of the club….a circular problem.

Another issue affecting newly formed clubs is credit history.  It is not that new clubs have bad credit history…they just don’t have any at all, since the legal entity and associated bank accounts do not yet reflect sufficient financial activity and management. 

For these newly formed clubs, the terms and conditions will be even more onerous.  A larger downpayment (we hear of 50% being typical) and then at least a point on top of an already high interest rate—but it doesn’t stop there.  In addition, it is common for the loan company to require two or more personal guarantors.  These will be club members who have sufficient means and credit history to carry the loan if, for some reason, the club defaults on payments or other terms.  This is a pretty big ask since a person’s personal financial situation is then at risk…and that is exactly why the loan companies do this…they want to spread the risk of default, by involving the people directly involved with the club—its members.

On the topic of new clubs, don’t forget to look at refinancing your loan after 3 or more years, when your accrued credit history will work in your favor, but be sure to research the small print on your existing loan and check for pre-payment clauses or other traps that could end up costing you more than you might save.

One other thing to think about is loan-insurance coupling.  The loan company may well require that the aircraft is insured for its top-dollar amount, likely quite a bit higher than if the aircraft was not being financed.  This higher level of coverage will incur a higher premium, but it may also introduce additional conditions from the insurance company, such as specific pilot qualifications (certificates and ratings), time in type, recurrent training, and so on, which all add up to more financial drain on the club, and therefore its members.

We usually suggest that clubs looking for financing start off by having a conversation with AOPA Aviation Financing (AAF), which may end being a one-stop-shop for initial and future loans.  This business unit within AOPA provides our members with access to loans though brokerage services. Just as insurance brokers work as intermediaries between you and the insurance underwriters, the staff at AAF provide the bridge between a club and the actual loan companies, and just like with insurance, the brokers can only help you if you first help your own case.  For insurance, listen to Flying Clubs Radio Edition 49: Insurance Revisited, but in the context of seeking a loan, be sure that your club’s financial records, reports, filings and tax obligations are all up to date and pass muster with a CPA.  In other words, ensure that your club is in good standing.  For more on this, see the July 2023 Question of the Month.

We’re talking about large amounts of money here, so of course you should shop around and look for other sources of financing—and the cost of that financing.  Take advantage of any personal or business relationships that you or another club member may have with a bank or other institutions like credit unions. We’ve seen this work well in rural areas where members may already have strong relationships with small, regional banks for financing expensive ag equipment such as combines and sprayers.  The point is that the bank knows you…and (good) personal relationships go a long way.  If you work for a company with an affiliation with a credit union that might be a very good option to pursue.

Let’s touch on another common question we hear from flying club officials:  Can clubs (anyone, really) get a loan for aircraft improvements, not just acquisitions?   The answer is yes, with all of the above caveats—terms, conditions, collateral and so on.  This is actually a good segue to the next part of this discussion, that of non-traditional sources of money…read on!

Non-Traditional Sources of Financing

Let’s initially consider aircraft improvements rather than acquisitions, per se.

Although the cost of new avionics or an engine overhaul requires a good-sized pile of money, it is generally a small percentage of the overall value of the aircraft and of course, improvements will add a stepwise increase to the value of the aircraft.  Just as an aside, this value improvement is quite transient, because after another 10-years, that “new” panel will be looking very dated and the engine will be ready for the next overhaul, but at least in the short term the increase in value will help the collateral equation for a loan.

Of course, planning for the engine and propeller overhaul should have started years ago… in fact, right after the last overhaul!  If you expect an overall to cost, say, $30,000, and the TBO is 2,000 hours, then $15 of the hourly usage fee must go into the reserve fund.  This is wonderful if the engine actually makes it to 2,000 hours (yes, I know that TBO is just a recommendation for Part 91 operations, but it is a reasonable number for this discussion), but what if it doesn’t?

By the way, if your newly acquired aircraft has only, say, 600 hours left until recommended overhaul, the club should be putting $50 per hour away, which will really impact the overall per-hour rate and perhaps the ability to attract new members.  On the other hand, an overhaul will be required, so how will you pay for it?

You could go try to get a loan for, say, $30-35,000, from AAF or a bank, but there is another option—member financing.  Actually, this applies equally to improvements as well as aircraft acquisitions, the difference being “just” the amount of money required.

In many clubs, the idea of member financing likely started with the need to pay for something that hadn’t been budgeted. Again, the engine overhaul is a good example, because even if you’ve been diligently putting $15 an hour away for the overhaul, if the engine develops a problem tomorrow, then the reserve fund will not have had enough time to accrue to the required amount. What’s a club to do?

Well, every flying club (and cricket club, and archery club, quilting club, knitting club…in fact every type of social/hobby club that uses and consumes equipment), must, simply must, include a clause in its bylaws that requires members to pony-up to cover un-or-under-budgeted expenses.  This is usually called the assessment clause and it is an excellent way for hobby clubs to get out of trouble, every now and then, but don’t try to run a club with this as the only recourse.  Apart from the case of a planned and budgeted expense arriving earlier than anticipated, triggering an assessment, and the regular triggering of assessments, is a really strong indicator of a very poorly run club. 

You might ask what happens if one or more members do not comply with an imposed assessment.  That, indeed, is an excellent question and I’ll add to the growing list of excellent questions for future Question of the Month articles.  As you can probably guess, I do have some thoughts and some opinions on that topic.

Okay then—when everyone behaves, assessment clauses demand that members equally cover the cost of some unexpected expense.  In other words, the members are financing the expense.  Whenever talking about member funding, it is essential to remind all members that they are sharing the cost—and that is one of the many advantages of being in a flying club.  In an n-person club, everyone pays an nth, but of course they have access to the whole enchilada.  As an example, in a 10-person club, a $30,000 panel upgrade costs each member only $3,000, but every one of them will be flying behind the full $30,000 worth of new kit.  Pretty obvious, but many times the grumpies in the club need reminding!

The idea of members funding large expenses may now be extrapolated to member funded aircraft acquisitions—and that is exactly what many clubs do—and have done—for years.  We’ll read in this month’s Club Spotlight that the TSS Flying club used member funding—also called self-financing, to purchase all of their aircraft. 

So, what is self-financed acquisition?  Simply put, all or a subset of members form a consortium that put up the money to purchase the club’s next plane.  The club, as a corporate entity, enters into a legal agreement with the group and negotiates the terms and conditions of the loan.  The member group is essentially acting as a bank, but don’t say that too loudly as they are not a bank at all…they are just loaning money for an agreed return. 

There are many good things about this:

  • The members of the consortium, particularly if it involves all club members, have real, tangible financial skin in the game.  It is indeed their club, with their aircraft, funded by their money.
  • Members are truly and literally investing in their flying club.
  • It costs money to borrow money, and someone will make a gain, so why not allow club members to benefit from the investment, rather than some faceless loan company?
  • Self-financing will often times cost less, as the consortium is generally amenable to lower interest rates compared with the take-it-or-leave-it approach from traditional loan companies–who still somehow manage to imply that they are doing you a favor.
  • More aircraft in a club usually opens up the possibly of membership growth, and so new sources of self-financing.  Be careful with growth, though…see the October 2023 and September 2022 editions of Question of the Month for more thoughts on growth and big clubs…be careful what you wish for.

On the topic of being careful, be acutely aware of possible conflicts of interest.  If all club members are involved in the self-financing opportunity, then of course, all board directors and club officers will be involved.  When only a subset is involved, you need to be careful.  To really illustrate the point, if only one club member is the source of financing, there is no way that that person should hold a position of power or influence, such as president or treasurer, as conflict of interest would rightfully be implied.

Before leaving this QoM, let’s look briefly at one other non-traditional way to finance the acquisition of the club’s latest pride and joy.

The idea of leasing-to-buy is also called rent-to-buy, hire-purchase, installment plan and owner financed.  The owner of the asset (or some intermediate party) allows you to use it, in return for payment with interest.  Eventually, you own the asset. This is also the way that some lucky people bought a brand new Ercoupe back in 1945, from Macy’s department store, on the “never-never”…“If you can drive a car, you can fly an airplane.” Umm…I wonder how that worked out…?

I’ve heard of lease-to-buy working well for flying clubs when the long-time owner/steward of an aircraft has to sell it, but really wants it to go to a good home.  Be warned, at some stage, depending on the time of sale and transfer of ownership, the club will become responsible for paying sales tax, in those unfortunate states that impose it on aircraft purchases.    

So, there you have it—some ideas to help you finance your next club aeroplane, and some alternatives to the more traditional ways of going about it.

As always, fly lots, and fly safely!

Stephen Bateman
Contributor, You Can Fly Program
Steve retired from AOPA in April 2024, but continues to contribute to You Can Fly programs. Contact Steve at [email protected]

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