Some lenders are seeing that the sky is the limit when it comes to aircraft financing.

With interest rates low and competition for loans intense, a number of banks have turned to specialties such as asset-based lending, equipment finance or Small Business Administration loans to drive profits.

Some banks now are turning to even more specialized niches, such as aircraft financing, as those other fields have become crowded.

Funding loans to buy airplanes can be a great way to attract wealthy clients and build revenue. It also carries numerous risks that can cause an inexperienced lender to lose millions, industry experts said.

"As lenders we are faced with trying to figure out where to add yielding assets in a not-robust economy," said Terry Keating, who leads U.S. growth initiatives for Accord Financial, a nonbank that provides financing for small and midsize businesses. "Everyone has gotten into the equipment financing and asset-based lending, and doing aircraft financing is a sign of taking it to the next step."

There are different options, such as financing, leasing or leasing with an option to buy. Borrowers can vary as well, ranging from aviation buffs to major airlines needing to update their fleets.

"Banks like to do it because they can put out big blocks of money at a time," said Nick Popovich, president of Sage-Popovich, a firm that provides aircraft repossession and other services. "It's a great industry to be in."

Bank of the Cascades in Bend, Ore., is diversifying its lending products and geographic markets by expanding into equipment financing. It has started with aircraft financing and seeks to crack into the manufacturing and other transportation sectors later this year, said Charles Reeves, the company's chief banking officer.

Aircraft financing was attractive because larger banks, which generally securitize their aircraft loans, saw less of a market for these loans after the financial crisis, said Dan Lee, senior vice president of aircraft financing at the bank.

Big banks reduced originations by limiting themselves primarily to larger borrowers — companies with annual revenue of more than $250 million — and only making loans for jets less than 10 years old, Lee added.

Bank of the Cascades, a unit of the $2.4 billion-asset Cascade Bancorp, is making loans of $500,000 to $10 million for businesses such as wealth management firms and large car dealerships that need aircraft for corporate use. The company made six such loans worth a combined $10 million in the second quarter.

"There is a real void now in aircraft financing," Lee added.

It is also a space that requires experience and a deep understanding of aviation, and if not done properly, a bank can lose a significant amount of money, experts said. For example, Fifth Third Bancorp in Cincinnati had to restate its first-quarter earnings in May after recording a $30 million impairment on aircraft leases.

Airplanes have ongoing costs that can add up, such as fuel, regular maintenance, a crew to fly it and a place to store it, and lenders need to ensure that their borrowers can cover these expenses, experts said. The pace of depreciation also depends on frequency of use, so an airplane used by a wealthy family for vacations will hold its value differently than a corporate jet used often, said David Mitchell, a principal at Miller Canfield, a law firm that has worked with lenders on aircraft financing.

Banks also need to record their interest in the airplanes they finance with an international registry to ensure they are able to seize the collateral and sell the planes if necessary, Mitchell added.

"This is something banks don't always realize they need to do," Mitchell said. "A bank that doesn't require that step is taking a risk that they won't be able to repossess that aircraft."

Even repossessing an airplane can pose unique challenges, experts said. Unlike a piece of land or a house, aircraft are mobile and it is harder to repossess airplanes from some parts of the world than others because of bureaucratic and legal requirements, said Popovich, whose company has repossessed more than 1,700 airplanes. Once he traveled to India to get an airplane only to discover that a group of people had moved into the aircraft and were living there.

Even something that is seemingly small can greatly affect the value of the collateral, experts said. For example, losing the plane's maintenance books can cut its value in half, said Steve Smestad, chief executive at Airfleet Capital, which helps several banks vet loan applicants and provide other services.

An aircraft owner may also be interested in a loan to invest in new equipment such as the electronic systems used on an airplane, but lenders have to be able to evaluate whether the upgrades are worth the money, he added.

"The challenge is you have to understand aviation and the technology behind it," Smestad said.

Banks can mitigate their risk to some extent by having a conservative loan-to-value ratio and making sure each aircraft has the proper insurance, experts said. And for the most part, "there is nothing stopping any organization from acquiring the knowledge other than if that's how you want to spend your time and money," Keating said.

Bank of the Cascades gained its knowledge of aircraft financing when it hired Lee earlier this year to head up its efforts. He has been in the business 25 years and is involved in the National Aircraft Finance Association.

"You can't just break into this group," Lee said. "They don't accept people rapidly. You need an understanding of the aircraft use and the collateral itself."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.