Loan to value explained for business borrowing

Loan to value, usually shortened to LTV, is the size of a loan compared with the value of the asset that secures it. The British Business Bank puts it this way for bridging loans: the lender advances a certain percentage of the security value, which is known as the loan-to-value ratio.

The asset is the security, also called collateral. The British Business Bank’s glossary describes security as something typically required by lenders against a loan, such as premises or plant equipment. LTV is the measure of how much of that asset’s value the lender is putting at stake.

A lower LTV means the debt is a smaller slice of the asset’s value. A higher LTV means the debt is closer to the whole value. That is why lenders look at it first on secured deals.

You calculate loan to value by dividing the loan amount by the asset’s value and multiplying by 100: LTV = loan ÷ asset value × 100. The asset value normally means the value a lender accepts, which is not always what you paid or what you hope to sell for.

The same sum works the other way round. If a lender will advance a set percentage of the value, multiply the value by that percentage to find the most it would lend, before it considers anything else about the business.

Lenders use loan to value to see how much room there is between the debt and the asset’s value if the loan is not repaid and the asset has to be sold. The more room there is, the more of the sale price is available to clear the debt after costs.

It is one input, not the whole decision. A lender will also look at whether the business can afford the repayments, how long it has traded and the borrower’s credit history. A low LTV does not make a weak business a good risk, and a higher LTV is not automatically a refusal. Everything is subject to status and the lender’s own criteria.

Because lenders set their own rules, the LTV one will accept varies by asset, product and provider. This article gives no typical figure for that reason: ask each lender for its current criteria rather than relying on a rule of thumb.

Loan to value is used wherever a loan is secured on an asset whose value can be measured, most often property. It is less relevant where there is no single asset behind the loan.

Where a loan is secured on a company’s assets through a charge, our guide to what a debenture is explains how that security is recorded.

Your loan to value changes whenever the loan or the asset’s value changes. Three things move it.

• The loan amount. Borrowing less, or paying the loan down, lowers the ratio.
• The valuation. A lender normally relies on a valuation it accepts. A lower valuation than you expected raises the ratio for the same loan.
• The deposit or equity you put in. The British Business Bank describes a commercial mortgage as a loan that involves paying a deposit followed by monthly repayments. A bigger deposit means a smaller loan against the same property.

Costs such as legal and valuation fees are usually separate from the loan itself, so check what a lender counts when it quotes a percentage. Ask whether the figure is based on the purchase price or on its own valuation.

If the asset loses value, the loan becomes a larger share of it, so your LTV rises even though you have not borrowed more. How that matters depends on the terms of your agreement.

Some agreements allow the lender to ask for more security or a part-repayment if the value falls below a set level. Others do not. Read the clause before you sign and ask the lender in plain terms what would happen if the value dropped.

Loan to value compares a loan with the asset’s value, loan to cost compares it with what the project costs, and gearing compares total debt with the business’s own funds. They answer different questions, so check which one a lender means.

Loan to cost is mainly used in property development, where the asset does not yet exist in its finished form and the value is uncertain. Gearing looks at the whole balance sheet rather than one loan. Lenders may use more than one of these ratios on the same deal.

You improve loan to value by borrowing less against the asset or by showing it is worth more, and you cannot change the second without evidence.

• Put in a larger deposit or use more of your own funds.
• Reduce the amount you need by phasing the project or finding other funding.
• Get a realistic valuation early so there is no surprise at offer stage.
• Offer additional security if you have it, and weigh the risk to that asset first.
• Keep up repayments on existing secured debt, which lowers the loan as time passes.

Compare the total cost of each route, not only the percentage a lender will advance. Our guide to comparing business loan lenders covers what to line up side by side. Asset-backed lenders are grouped in the directory of secured loan providers.

Capzy is a credit broker, not a lender, and is paid by the lender. For secured finance we introduce you to lenders whose products fit the asset and the purpose, and set out what comes back so you can compare it.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. Capzy does not give legal or valuation advice, so use a solicitor and a qualified valuer where a deal needs them.