BDC clarifies loan-to-value ratio for business loans

The Business Development Bank of Canada (BDC) has detailed the loan-to-value (LTV) ratio, a fundamental calculation for assessing secured business loans. The LTV ratio establishes the relationship between the amount of a loan and the market value of an asset pledged as collateral, thereby determining the maximum secured loan amount a business can receive.

The ratio is calculated by dividing the requested loan amount by the market value of the collateral. For instance, a business seeking an $800,000 loan for a building valued at $1,000,000 would have an LTV ratio of 80 percent. BDC emphasizes that the ease with which an asset can be converted to cash significantly impacts its LTV.

Highly liquid assets, such as marketable securities, typically allow for higher LTV ratios (up to 90%), while less liquid assets like inventory generally receive lower ratios (down to 50%). Financial institutions consider factors beyond LTV, including profitability, cash flow, industry trends, and equity. "A company must be profitable to repay its loan," stated François-Xavier Lemay, Manager at BDC.

While paying down debt with surplus cash can improve a company's LTV, BDC suggests this might not always be the most advantageous strategy for a growing business. Retaining capital for reinvestment in expansion or other growth opportunities may offer greater long-term benefits.