Understanding Loan to Value and how to use it helps you borrow more money with better terms.
Consider 7 ways, detailed further below to maximize your borrowing strength.
Apply below: Business loans to maximize the value on loans you can get!
7 ways to use loan to value to help get the loan you want.
1. Loan to value or LTV. How it works:
Loan to value is the loan amount a lender offers as a percent of the value of any asset they take as collateral.
Your business applies for a loan. The lender wants collateral as security and tells you real estate is required. Because you need a large business loan, you agree and offer residential real estate.
Your home is worth $300,000. The lender has a maximum LTV policy of 75% against real estate.
In this example, the maximum loan amount would be $300,000 X .75%
= $225,000. If your home is free and clear and the lender agrees to a 75% loan to value, then the raw loan amount will be $225,000.
Example # 2
Instead of real estate, you offer equipment or vehicles. The loan to value offered will be much lower. 35% to 60% is the most common range, depending on the lender and only based on the equipment they choose to accept. Lenders rarely are interested in all of the equipment available but may take a blanket lien anyway.
You provided an equipment list with $100,000 in equipment. The maximum Loan to value, LTV is $30% but you are only being offered $15,000. What happened? The lender likely only is interested in $50,000 of the $100,000 in equipment. As a result $50,000 X .30% = $15,000.
2. Use valued assets to boost your offer.
Example # 1:
A business loan applicant qualifies for $25,000 unsecured, but they really need $75,000. The borrower offers their vehicles and construction equipment to try to get more.
The retail value on the equipment is $150,000 and the lender offers a 40% LTV loan to value against that equipment. This equals $60,000 combined with the $25,000 the lender offered unsecured. Combining the two, the lender agrees to offer up to $85,000. By using the 40% loan to value offered against the equipment, the borrower is able to boost the offer by $60,000.
Knowing this, applicants can estimate what lenders will offer in advance for the collateral they have. The borrower can use that information to decide if they should apply for an unsecured line, or secured with assets.
Almost all borrowers think they cannot negotiate and do not have any power when it comes to the loan process. The borrower does not have the upper hand, but they can get a lot by taking the right steps at the right time.
Negotiate during the request. Even if they decline what you are negotiating for, you may still get other improved terms if you had only asked for them.
Ask for higher amounts, longer terms, better rates and early payoff terms. The lenders is not going to give you better terms unless you ask for them.
4. Risk – You can lose your valued assets!
First decide if it is worth it to use your assets to get money?
If you must have more money, then you must use your assets. Strong cash flow and credit are the best ways to avoid having to use assets for either a business or personal loan.
The borrower has to decide if the risk they go past due is high and whether they can afford to lose the asset. If the borrower cannot run the business without the asset, they should carefully consider whether they should put it on the line or not.
5. How to get the highest % Loan against the value of assets.
Listed stocks, certificate of deposits and any other liquid asset usually brings the highest loan amount. This can be up to 100% since the balance of the loan goes down, but the value of the asset does not.
Real Estate also brings a high loan amount as a percent of the asset’s market value. Most real estate backed loan offers are in the 65% to 85% of the market value of the asset.
After real estate, percentages drop down a lot. Equipment usually brings between 35% and 50%. Traditional banks rarely makes these types of loans and usually only offer 10% to 15%.
6. How credit affects LTV Loan to value
Credit scores do affect loan to value. The same applicant with a 700 credit score may get a higher loan to value offer than a 575 credit score with the exact same profile.
Lenders will offer more on secured transactions for borrowers with a higher credit score. Lower credit scores are always considered a higher risk and tend to bring a lower loan to value.
An applicant with a 725 bureau score uses their free and clear commercial property to get a business loan. The property is worth $1,000,000. They go to a bank that offers a maximum 75% loan to value against real estate.
This applicant that has a 725 credit score gets a loan offer with a 75% LTV, which equals $750,000.
An applicant with a 600 credit score gets a 60% LTV offer, which equals $600,000. This is common in practice. In this case, an applicant can get $125,000 more or less, depending on their credit score.
7. Valuations: How appraisals fit in
Many asset based loan offers use asset valuation tables and market estimates to arrive at the offer amount.
Provide any asset appraisals you have that are less than 6 months old. Doing so should protect you from getting a low ball offer. Consider ordering an appraisal of your assets when you get an offer you think is too far below market value. Lenders tend to make conservative estimates that help them, not you.
FAQ on Loan to Value.
What is Loan to Value?
The amount a lender will offer as a percentage of the market value of assets. An asset valued at $100,000 with a 60% loan to value may result in a loan offer of up to $60,000.
How can loan to value help me?
It helps borrowers decide whether to apply for a secured or unsecured loan. It also helps them decide what types and how much collateral to offer to the lender. The biggest benefit is that is brings larger loan offers.
What can I do to get a higher loan to value offer?
Call the lender and ask what types of collateral they will accept and what percentage they will loan against it. Real Estate will bring the highest loan offers and should be provided to get higher offers.
Why is the lender offering a low amount compared to the value of my asset?
It is usually because they only offer a certain percent of the value of the asset. They want to get their money in case of a default and can recover all of it by offering a low amount compared to the market value of your asset.
Negotiating after you have been approved may get you some concessions in terms from the lender. Ask for a higher amount when you know the offer is too low compared to the market value.
Understanding what loan to value is and how to use it can help you get loan approvals for higher amounts and terms more favorable to you!