Understanding Loan-to-Value Ratios in Secured Business Loans

how loan-to-value (LTV) ratios impact secured business loans
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Secured business loans offer companies the opportunity to access capital by offering assets as collateral. And one of the most important parts of the process that both lenders and borrowers should understand is the Loan-to-Value (LTV) ratio. Knowing what this means helps you make smart financial decisions and take out secured business loans with confidence, therefore reducing risk and securing the long-term future of your organisation.

In this guide, we’ll explain what LTV means, how it impacts your loan options and how to use it to your advantage, specifically when it comes to applying for a loan in the UK. Whether you’re applying for a loan backed by property, equipment or inventory, understanding your LTV can help you secure better terms and avoid unwelcome surprises.

What Is a Loan-to-Value (LTV) Ratio?

The loan-to-value ratio is a financial metric that compares the size of a loan to the value of the asset securing it. Expressed as a percentage, it’s used by lenders to assess risk. A lower LTV suggests less risk for the lender, while a higher LTV suggests greater exposure.

Why does it matter?

  • Determines the amount you can borrow.
  • Influences interest rates and loan terms.
  • Impacts your approval chances.

For secured business loans, the LTV ratio plays a key role in shaping your borrowing capacity and the overall cost of borrowing.

Example: If you apply for a £100,000 loan secured against an asset worth £200,000, your LTV ratio is 50%.

How to Calculate Loan-to-Value (LTV)

Knowing how to work out loan-to-value rate can help you estimate your borrowing capacity before applying, which saves you time and prevents the need for unnecessary credit checks. The standard formula for calculating the LTV ratio is:

LTV Ratio = (Loan Amount ÷ Collateral Value) × 100

Let’s look at a quick example:

  • Loan amount: £70,000
  • Collateral value: £100,000
  • LTV: (70,000 / 100,000) × 100 = 70%

This means the lender is offering you a loan that’s equal to 70% of the asset’s value.

Knowing how to calculate LTV can help you negotiate better terms and prepare the right documentation.

Typical LTV Ratios by Collateral Type

Lenders assign different risk levels to different types of collateral. Here are typical LTV ranges in the UK based on asset class:

Collateral type Typical LTV range
Real estate

70-80%

Machinery and equipment

50-70%

Inventory and receivables

30-50%

 

Real estate is the most favourable asset due to its stable market value. Equipment and machinery depreciate over time, so LTV is lower. Inventory and receivables are riskier and harder to value, resulting in the lowest LTVs.

Factors That Influence LTV in Secured Business Loans

Several elements can impact the LTV ratio you’re offered:

1. Type of Collateral

  • Lenders prefer tangible, long-lasting assets.
  • Liquidation value vs. market value plays a role.

2. Appraisal Method

  • Market Value: What the asset might fetch on the open market.
  • Appraised Value: Determined by a professional valuer.
  • Liquidation Value: A Conservative estimate is used if the lender must sell the asset quickly.

3. Borrower Creditworthiness

  • Strong credit score and trading history will lead to better LTV terms.
  • Poor credit will lead to lower LTV or additional security required.

4. Lender Risk Tolerance

  • Some lenders have hard caps (e.g., 80% LTV on property).
  • Other lenders may allow higher LTVs at the cost of higher interest.

5. Loan Type and Term

  • Shorter-term loans often come with stricter LTV requirements.

To learn more, read our article on understanding secured loans.

Combined Loan-to-Value (CLTV) Explained

Combined Loan-to-Value (CLTV) measures the total value of all loans secured by a single asset. It’s important when more than one lender has a claim on the collateral.

CLTV Formula:

CLTV = (Total Loan Balances ÷ Collateral Value) × 100

Example:

  • First loan: £60,000
  • Second loan: £20,000
  • Collateral value: £100,000
  • CLTV = ((60,000 + 20,000) / 100,000) × 100 = 80%

CLTV is especially relevant in situations involving mezzanine finance or multiple secured facilities. If CLTV is too high, lenders may reject new loan applications.

Practical Tips to Improve Your LTV Ratio

Improving your LTV ratio can help you unlock better loan terms, reduce interest rates and increase your borrowing potential. Here are proven strategies:

  • Get a professional valuation: A high-quality appraisal can increase your asset value.
  • Request a smaller loan: Lowering your loan request naturally reduces LTV.
  • Offer additional collateral: Add more assets to bring down your LTV ratio.
  • Improve your credit score: Strong credit can influence the lender’s willingness to offer a higher LTV.
  • Choose the right lender: Some specialise in higher-risk, higher-LTV lending.
  • Monitor market conditions: Keep an eye on market trends. If the value of your collateral increases, your LTV ratio can improve.

Each of these can move your LTV into a range more attractive to lenders and help you secure more competitive loan-to-value interest rates.

Summary: Why LTV Matters for Secured Business Loans

Understanding and optimising your loan-to-value ratio is important when applying for secured business finance. It directly affects:

  • How much you can borrow
  • The rate you’ll pay
  • Whether you get approved at all

Knowing your LTV and how to improve it can put you in a stronger position when negotiating with lenders.

If you’re considering a secured business loan and want to understand your options, the experts at Funding Guru are here to help. Apply for a business loan today.

FAQs About LTV in Secured Business Loans

What is considered a good LTV ratio for a business loan?

A loan-to-value rate below 70% is generally considered favourable. It indicates a lower risk to the lender, often resulting in better interest rates and approval odds.

However, a good LTV does depend on the asset:

  • 70-80% is excellent for property.
  • 50-60% is strong for equipment.
  • Below 50% is typically expected for inventory.

Does a higher LTV mean higher interest rates?

Yes. Higher LTV equals greater risk for the lender, which often results in a higher interest rate or additional fees.

Is insurance required for higher LTV loans?

While not always mandatory, lenders may require asset insurance or personal guarantees to offset risk when LTV is high.

How do you calculate LTV for a business loan with multiple assets?

Calculate the total loan value and divide by the combined market value of all assets offered as collateral.

Can LTV affect loan approval?

Yes. If your LTV exceeds the lender’s threshold, your application may be declined or sent back for renegotiation.

AUTHOR 

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Jeremy Baker

Expert in content, funding research & finance marketing. Jeremy has over 8 years of experience, providing finance firms with outstanding written content for UK audiences.
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