By Gib Bosworth, Managing Director, Aerospace at GE Capital, Corporate Finance

Today’s 24-hour news cycle delivers a constant stream of often overhyped political and economic developments that can all too easily distract corporate leaders and delay decision making. But it’s critical that aerospace company CFOs filter out the noise and stay focused on maximizing financial efficiency to grow the business for the long term, this is especially true given the capital intensity of the aerospace industry.

The aerospace industry is in the midst of a manufacturing super cycle, and a majority of firms expect their revenue to increase in 2016, according to a recent survey of middle market aerospace executives conducted by GE Capital. That’s why now is a good time to maximize financing efficiency and leverage important strategies that are often overlooked and can dramatically improve a company’s competitive position.

1. Identify Local Incentives
One strategy to employ is to work to secure incentives from local governments. Before reinvesting in the business, it behooves the CFO to shop around to the local and neighboring governments to learn what incentives are available. If local leaders are looking to boost economic activity and job creation, they may be especially motivated to help the company.

The two most common types of incentive programs are IDBs (industrial development bonds) and PILOT bonds (payment in lieu of taxes). IDBs are issued by a governmental entity to provide tax-exempt financing normally reserved for governments and non-profit organizations. The government’s goal in providing the debt securities is to improve the economic and employment conditions of its region. PILOTs, meanwhile, are negotiated payments made by companies to governments. These payments are often significantly less than what the company would otherwise pay in taxes.

These programs are not available everywhere, and the research can take time, requiring visits and meetings with government leaders at several neighboring municipalities to get a full understanding of the incentives available. But this research investment can pay off—giving the CFO negotiating leverage with government officials who want the business within their borders. Some companies can see as high as 50% in property tax abatements.

But remember, it’s critical to research these options before any work is started. Once work has begun, few municipalities will put incentives on the table. It can be helpful during this research phase to talk to local government officials and representatives as well as work with a lender with experience researching and negotiating IDBs and PILOTs.

2. Seek Financial Diversity
Another underleveraged way for an aerospace firm to boost financial efficiency and flexibility is by using a diversity of financing. According to GE Capital’s survey, capital expenditures are expected to be greater for 51% of commercial aviation firms, and 35% will consider additional financing for working capital. With this expected growth, a mixture of financing options: cash, loans and leases is a sound approach to financing equipment. The reason is that each has its pros and cons and together they act as a kind of hedge against the unpredictable future of the business cycle and customer demand. While much of the aeropsace industry is currently enjoying a robust super cycle of growth, it is always prudent to plan for future eventualities. For example, taking a long-term loan for equipment that a company is certain it wants to own is a smart way to take advantage of lower interest rates. Meanwhile, cash purchases allow a company to keep its overall debt load and interest payments down—which may be advantageous for cash flow purposes.
  
Finally, equipment leasing, with an option to extend or purchase, allows a company to walk away from equipment if consumer demands drops, or hold onto it should demand stay strong or increase. Like hedging a commodity, hedging equipment needs through financial diversity ultimately strengthens the company by putting it in a better position to respond nimbly to business developments. Finding a lender with deep industry expertise can help a company develop the right mix of financing and make the choices easier to make.

3. Maximize Lease Flexibility
If the decision is made to lease equipment, as is common in the aerospace industry, it’s imperative to structure the lease to maximize flexibility. For example, if the company believes there’s even a chance that it will want to keep the equipment past the end date of the lease, then it’s prudent to put a fixed-purchase option at some point in the lease to ensure the company has continued access to the equipment if need be.

However, if the company is leasing an asset that it’s sure it will return, then entering into a true Fair Market Value (FMV) lease is probably the most efficient financing option. A FMV lease provides the right, but not the obligation, to buy a leased asset at the end of the lease term for a price that represents the equipment’s current worth. The FMV purchase option does not provide the purchase price in advance, but as long as the assessed fair market value is accurate, the lessee will not overpay for the asset and the lessor will not receive less than the asset is worth. A tax accountant can be particularly useful to a CFO when assessing the pros and cons of different lease types.

Stay Focused on the Goal
The current super cycle in aerospace offers a tremendous amount of growth opportunities, but in order to take advantage of the favorable market CFOs must be diligent about growing the business with the most efficient financing possible. By investigating local incentives, maintaining a mix of financing options and building in lease flexibility, today’s financing leaders can boost financing efficiency while promoting long-term growth. An experienced lender with deep aerospace industry expertise can be invaluable in pursuing these financing strategies.

Gib Bosworth ([email protected]) is managing director of the aerospace vertical at GE Capital, Corporate Finance, specializing in providing commercial loans and equipment finance to mid-size companies for growth, acquisitions, turnarounds and balance sheet optimization. gecapital.com/aviationsuppliers