Loan-to-value

Loan-to-value, or LTV, is the financed amount divided by the equipment’s supportable value, expressed as a percentage. It shows how much of the collateral value is being financed. A lower LTV generally means the borrower contributes more cash or finances less, reducing the funding partner’s collateral exposure.

Key takeaways

• LTV is based on supportable value, which may differ from the seller’s price.
• A higher LTV finances more of the collateral value.
• A lower LTV generally requires more borrower cash or a smaller financed amount.
• There is no universal acceptable LTV across all equipment programs.
• Taxes, delivery, attachments, and other soft costs can change the effective structure.

Why funding partners use LTV

LTV gives the funding partner a consistent way to compare the proposed exposure with the value of the equipment supporting it. It does not answer whether the business can afford the payment, and it does not replace credit or cash-flow underwriting. It addresses a narrower question: how much of the equipment’s supportable value would be financed?

Three figures must be kept separate:

• Purchase price: what the seller is charging.
• Supportable value: the value accepted for underwriting, based on market data, an internal valuation, inspection, or appraisal.
• Amount financed: the portion the funding partner agrees to fund.

Confusing price with value is one of the most common reasons a buyer underestimates the cash required at closing.

Formula

LTV = Amount financed ÷ Equipment value

Worked example

A machine has a supportable value of $100,000, and the approved financing is $80,000.

$80,000 ÷ $100,000 = 0.80
0.80 × 100 = 80% LTV

The remaining $20,000 is the value not financed. When value and purchase price are the same, that commonly corresponds to a 20% cash contribution.

When purchase price is above value

A seller asks $110,000, but the funding partner supports a value of $100,000. At an 80% LTV:

Supportable value:       $100,000
Approved LTV:                 80%
Maximum financing:        $80,000
Seller price:             $110,000
Buyer cash required:       $30,000

The buyer contributes 27.3% of the purchase price, even though the funding partner used an 80% LTV.

What affects LTV

The supportable value may come from market comparisons, auction and dealer data, a desktop valuation, an inspection, or a formal appraisal. Not every valuation is a USPAP appraisal; the method depends on the funding partner, asset, transaction size, and level of uncertainty.[1]

Factors include:

• Equipment age
• Condition
• Hours or usage
• Remaining useful life
• Resale market
• Price
• Seller type
• Inspection or appraisal
• Attachments
• Credit profile
• Time in business
• Transaction size
• Requested term

A funding partner can also limit financing for reasons unrelated to collateral value, such as payment capacity or program exposure.

LTV versus advance amount

LTV describes collateral coverage. The approved amount is the actual dollar amount offered.

An underwriter may approve less than the maximum theoretical LTV because the business cannot support the payment.

How LTV affects financing

A lower LTV can:

• Reduce the financed amount
• Lower the payment
• Close a valuation gap
• Strengthen collateral coverage
• Require more borrower cash

A higher LTV preserves cash but increases financed exposure and may not be available for every borrower or asset.

Sources

1. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice