A secured business loan can be a beneficial financial instrument to expand your business. However, before availing this financial solution, it is essential to understand the fundamentals of LTV and the properties that are eligible as collateral.
What is LTV?
Being aware of the Loan-to-Value ratio is essential before applying for a business loan, as it is a crucial measurement system in secured lending procedures. LTV (Loan-to-Value) is a ratio that determines the maximum amount of a secured loan that can be availed by a borrower depending on the market value of the assets put up as collateral by them. The LTV varies depending on the type of property being pledged as collateral by the borrower.
How is LTV Calculated?
To evaluate the LTV ratio, multiply the loan amount by 100 and then divide it by the appraised value of the asset:
For instance, if the amount of loan is around ₹50 lakhs and the appraised value of the asset is about ₹1 crore, then the LTV of the property is:
Role of LTV in Secured Business Loans: High LTV versus Low LTV
The lower the LTV ratio of the property, the better it is for both the lender and the borrower. A low LTV ratio is perceived to be a less risky option for the lender. In case a borrower defaults on the loan, then the lender can recover the remaining amount of loan from the property exhibiting low LTV. This enhances the chances of securing the loan. The low LTV ratio also ensures that borrowers can readily apply for a business loan with favourable repayment terms and interest rates. The preferred LTV ratio differs from one lender to another.
On the other hand, a property with high LTV ratio can be quite risky for the lender. It signals that the amount of loan makes up a large portion of the appraised value of the asset. If the LTV is high, then the lender may impose stricter repayment terms and higher interest rates on the borrowers as a precaution.
Types of Properties That Can Be Used as Collateral & Their LTV
a) Residential Properties
Apartments, condos, townhouses, and duplexes are some of the common immovable assets that can be pledged as collateral. The property owned by the borrower can be either vacant or actively in use.
b) Industrial Properties
Warehouses, showrooms, cold storage, light assembly, truck terminals, and flex spaces are some of the common Industrial properties that can be pledged as collateral.
c) Commercial Real Estate
Office buildings, factories, restaurants, hotels, bars, healthcare centres, and shopping centres are some of the popular commercial real estate properties.
d) Plots and Land
Residential as well as commercial plots and land can be pledged as collateral to secure the loan. However, the municipality or the appropriate coordinating authority must clearly illustrate the boundaries of the plot or the land pledged as collateral.
Multiple Ownership of a Property
Properties with multiple owners can also be used as collateral to back the loan. However, a property must be co-owned by close family members without any dispute over the ownership. Lenders often prefer ownership of the property to be shared with parents, siblings, or children. Co-ownership with in-laws, friends, and acquaintances is also accepted by certain lenders. All the co-owners must reach an agreement to use the property as collateral. Moreover, the property must be recorded in the name of the company without any legal cases or issues.
How to Lower Your LTV?
a) Make a Large Down Payment
Saving up money can help borrowers make a large down payment while purchasing any machinery, equipment, or property for business expansion. This can drastically cut down the loan amount that needs to be borrowed. This will, in turn, lower the LTV ratio of the pledged collateral.
b) Opt for Low Loan Amounts
Borrowers should decide their loan amount on the basis of their repayment capabilities. Going for low loan amounts helps borrowers pay their monthly EMIs on time without missing them during fluctuations in revenue. Borrowers can determine the appropriate amount by carefully managing their finances. This can also help them clear off the debts faster. For saving money, borrowers can track their finances and draft a budget plan for cutting down the additional costs. They can also try optimizing the equipment usage for generating lower bills.
c) Choose High-Value Properties
Selecting a property with high market value can increase the chances of availing a secured business loan. Generally, commercial properties have higher market values than the other types of properties. A borrower can secure the loan with his commercial properties for better repayment terms.
d) Improve Your Creditworthiness
Having a high CIBIL score may enable borrowers to have good LTV ratios. This can be done by clearing existing debts with timely repayment strategies. It is also necessary to consistently maintain a strong financial record. Borrowers may have to submit balance sheets, tax returns, and income statements as their financial records for demonstrating stable revenue of their businesses.
LTV is considered one of the crucial factors while determining the loan amount that can be borrowed. Learning about the impact of LTV on a secured business loan can help borrowers in making thoughtful decisions. Additionally, understanding how to find a reliable lender is equally important.
At Arka, we not only offer favourable interest rates and repayment terms, but also competitive LTV for your secured loans. We are committed to offering tailored secured business loans that can help businesses get ahead in the competitive market.
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