The lender will calculate all monthly payments, including the projected new aircraft debt and the cost of ownership (estimated costs associated with the aircraft). Then it’s simple to divide your debt by your income. Generally, the lender wants that ratio to be less than 45%.
Business owners are similarly evaluated in that they must demonstrate the ability to repay the loan by the end of its term. But how business owners pay also affects their overall financial picture. This is because many business owners do not pay themselves a salary, but instead take money from the distribution of retained earnings from the company. Or they can give themselves a smaller salary, supplementing it with a distribution.
This is why lenders in loan applications from self-employed individuals or business owners are focused on the global coverage of the individual’s debt. This debt includes all the various business entities in which the individual has ownership or control.
From this, the lender will estimate available cash flow or net income. Then they will add back amortization, back interest, back amortization and even future taxes. This gives the lender a clearer understanding of cash flow. From those total debts, the lender will determine the ability to pay debt service at a level that is usually 1.25 to 1.35 times higher.
A business owner may wish to discharge, discount or exclude a K-1, or an entity in which he has significant ownership that shows a loss. For the lender, the losses are just as significant as the gains. They’ll want to know how the business owner is making up for that loss, especially when it comes to being able to cover all the debt, including the airplane loan. In many circumstances, the business will need to be a guarantor for the loan, especially when it is the primary income for the applicant and/or the aircraft is registered to this person.
For these reasons, the financial picture for a business owner can be much more complicated than that of a W-2 employee. A salaried person can usually just file a tax return with the loan application. A business owner will want to provide financial statements that the lender can have some degree of confidence in, such as two or three years of CPA-prepared or interim financials. At a minimum, lenders will require the last two full years of tax returns and year-to-date profit and loss, a balance sheet and a debt schedule that includes all debts related to the business.
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