Aircraft Financing Key Terms

Definitions for some of the more confusing aircraft financing terms

Aircraft financing is, to the first-time buyer, a mystifying field. While it's not terribly unlike financing a vehicle in a general sense, you'll find yourself suddenly face-to-face with unfamiliar terms, mostly relating to the maintenance and overhaul requirements of the aircraft you're about to purchase.

In order to negotiate a successful financed aircraft purchase, you must be familiar with the basic features and characteristics of the aircraft you're buying. You also need to know the building blocks of how the aircraft will be financed and what typical parameters for such a purchase are. The following terms will help to get you started.

 

Time Between Overhaul (TBO)

TBO is a common aviation acronym that stands for Time Between Overhaul. This represents the amount of time an engine can be in service with normal maintenance before it must be overhauled; literally, it must be stripped to its component parts, inspected and rebuilt. You'll want to take the manufacturer-specified TBO for all aircraft parts into account when selecting an aircraft to finance.
Try: NOVA Online discusses the significance of how the TBO extended greatly when jet engines were first introduced, and why this had such an impact on aviation safety.

Piston engines vs. jet engines

Piston engines were the earliest form of aircraft engines. All aircraft were powered by some form of a piston engine until the first gas turbine, or jet engine aircraft, took off in 1939. Piston engines continue to be used in a variety of aircraft today, and may affect the value of your aircraft during its financing appraisal.
Try: The National Business Aviation Association gives details about the types of piston aircraft you're likely to encounter.

Professional engagement period

The professional engagement period is defined by how long you retain a specific accounting firm's services to help you evaluate, negotiate and obtain financing for your aircraft.
Try: The Journal of Accountancy offers a detailed explanation of the professional engagement period.

Escrow service

An escrow service or agent may be an attorney, a financing agent or almost any trusted third party that is contracted to hold the title to a particular large purchase until both buyer and seller have met the terms of the financing agreement. Using an escrow service to help you negotiate the purchase or sale of a financed aircraft, especially when you're not familiar with the other party in the transaction, is highly recommended.
Try: Investopedia defines what services an escrow agent or service will provide in relation to large purchases, such as aircraft or homes.

Pre-purchase inspection vs. aircraft appraisal

A pre-purchase inspection in an aircraft transaction is much the same as getting a vehicle inspected before purchasing it. The pre-purchase inspection offers you an impartial evaluation of the functioning capacity and mechanical quality of the property you're looking at purchasing. An aircraft appraisal, on the other hand, is an impartial appraisal of the aircraft's monetary value.
Try: LoansAircraft.com offers a detailed explanation of the differences between pre-purchase inspections and aircraft appraisals.

Index based loans

Index based loans are a common type of loan you may encounter when considering aircraft financing options. Index based loans are variable rate loans based on the current Prime Interest Rate (PIR). As the PIR changes, so does the interest rate on the index based loan.
Try: AV FundSource gives a detailed explanation of the pros and cons of various common types of aircraft financing, including index based loans.

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