IADA verified member, Adam Meredith, President of AOPA Aviation Finance Company, discusses when a deposit is required and why during your aircraft deal.
Typically, larger airplane transactions require deposits, specifically, deals of a million dollars or more. Why do lenders ask for a deposit? As the old saying goes, “Trust, but verify.”
Larger transactions tend to involve assessing more sophisticated, more complicated financials. Often multiple legal entities may be involved. Each of the entities need to be reviewed, requiring substantially more due diligence. The additional due diligence accrues additional costs in the form of time, resources, third-party background checks, and other checks and searches. All of those things equate to unavoidable upfront costs.
Understandably, a lender is loath to go out of pocket on a transaction after putting forth so much effort. It’s not enough to trust that a borrower is committed to the deal. A deposit verifies that commitment. The size of the deposit depends on the selling price. It’s usually proportional, ranging from a couple thousand dollars up to one percent of what’s been negotiated.
It’s always prudent to expect to submit a deposit, even when the topic isn’t initially mentioned. Deposit discussions generally occur after a term sheet--a broad estimate of structure-- is drawn up and then agreed to by both parties. Only once the borrower agrees to the terms and conditions and decides to move forward should a deposit discussion take place. Anything sooner should fire off alarm bells.
If your transaction requires a deposit, we cannot overstate the importance of dealing with a trusted financial institution or escrow company If in doubt, give AOPA Aviation Finance a call. We work with trusted escrow agents all the time. We will help you find one with which both parties to your transaction can feel comfortable.
If you’re working through a bank, our position is that institution is an appropriate place to hold the deposit. If you’re not working with a bank, we strongly recommend an escrow agent to handle that duty. In past articles, I referenced using third-party escrow services to hold the deposit. That’s because there are occasions when it is better to have an escrow agent bear the burden. A broker or a private party seller are examples of entities which are not highly regulated, if at all. As such they don’t have as much exposure to liability and are proportionally more difficult to extract compensation from should the deal go awry, compared to highly regulated banks.
Escrow companies tend to carry errors and omissions insurance, and many of the good ones are also bonded. Neither of those assurances match the accountability found in banking regulations, though. With your deposit at a bank, regulators and regulations back you in the event the deal goes sideways.
Enlisting the services of someone trusted like AOPA Aviation Finance will ensure whomever you work with is properly vetted, and that you are working with reputable folks. Regardless of whom you add to your team to work on the deal, important questions to ask and get answered before putting down a deposit include, “Are you bonded? What errors and omissions insurance do you have? Do you have references from satisfied customers? Have you ever been sued?”
This article was originally published by AOPA Finance on December 10, 2019.