Just imagine you need some funds for your new business but banks are not willing to fund the new innovative business model. You don’t have much savings to fall upon to fund your dream project. You can still get a loan by mortgaging your property for that loan. In banking parlance, it is referred to as Loan against Property (LAP).
You can get a Loan against Property (LAP) against your existing residential or commercial properties. However, the value of the loan you can avail of primarily depends upon the valuation of the property. Further, the bank and financial institutions need to have sufficient cushion towards decline/ erosion in the value of the property so mortgaged. This is where the concept of Loan-to-Value ratio comes in.
Concept of Loan to Value (LTV) Ratio
Loan to Value (LTV) ratio denotes how much amount of loan a bank can give against a property. 80% LTV will, therefore, represent that the borrower can only get 80% of the total value as bank loans.
Considering the risk involved and other concentration measures, RBI has notified different LTV ratios for different categories of housing loans.
However, for business loans and Loan against Property (LAP), RBI does not prescribe the LTV ratios. As per the prevailing industry practices, LTV typically ranges from 45% to 70% in LAP (depending on type and usage of property); 70% to 100% in working capital which are secured against property. The higher LTV in working capital is directly proportional to the quality of financial reporting, since better reporting increases the bank’s comfort on the financials of the business.
Banks manage their business risks including the default risk of the borrowers through various measures. A lower loan to value ratio implies higher investment by the borrower into the property. It, therefore, protects the interests of the bank in case the market value of the property decreases.
While acceptable LTV ratios vary for different banks, Loan Frame helps you get the best deal for your business loans. Loan Frame negotiates very hard with banks on behalf of the small businesses to help these businesses get higher LTV and therefore a higher loan amount. Loan Frame makes use of technology to help you connect to the right lender for your business loan needs.