Loan-to-Value & Loan-to-Cost
“LTV talks the value. LTC walks the cost”
LTV & LTC: Core Concepts in Business Lending
Loan-to-Value (LTV) and Loan-to-Cost (LTC) are critical ratios in business lending, especially for real estate, construction, and asset-based financing. Understanding both gives business owners and bankers a clearer picture of risk, equity requirements, and funding feasibility.
What Are LTV and LTC?
| Term | Definition | Formula | Used For |
|---|---|---|---|
| LTV (Loan-to-Value) | Measures the loan amount relative to the market value of the asset or property. | Loan Amount ÷ Appraised Property Value | Risk assessment based on asset value |
| LTC (Loan-to-Cost) | Measures the loan amount relative to the total cost of acquiring or developing the asset. | Loan Amount ÷ Total Project Cost | Funding assessment based on investment cost |
LTV vs. LTC: What’s the Difference?
| Loan-to-Value (LTV) | Loan-to-Cost (LTC) | |
|---|---|---|
| Focuses on | Appraised market value | Total cost to acquire/build |
| Used in | Refinances, real estate loans, collateralized loans | Development, construction, business acquisition |
| Risk Lens | Risk vs. current asset value | Risk vs. investment effort |
| Can Diverge When | Market value rises/falls from cost basis | Project costs are inflated or under market value |
Example: Building a New Facility
Loan Amount: $4,000,000
Total Project Cost: $5,000,000
Appraised Value Upon Completion: $5,500,000
- LTC = $4M ÷ $5M = 80%
- LTV = $4M ÷ $5.5M = 72.7%
✔️ The lender sees that you’re covering 20% of the cost (LTC), and the loan is well secured based on future value (LTV).
🏦 Typical Benchmarks
| Financing Type | Typical Max LTV | Typical Max LTC |
|---|---|---|
| Owner-Occupied Real Estate | 75–85% | 80–90% |
| Investment Property | 65–75% | 70–85% |
| Construction Financing | 60–75% | 70–85% |
| SBA 504 Loans | Up to 90% | Often up to 90% |
Why LTV and LTC Matter in Business Finance
✅ For Business Owners:
- These ratios determine how much equity or cash you’ll need to contribute.
- They affect your ability to secure financing, especially for property development.
- Understanding LTV/LTC helps you negotiate better terms and plan for long-term capital needs.
✅ For Bankers & Lenders:
- LTV assesses collateral value — the higher the LTV, the greater the risk to the lender.
- LTC shows how much of the project’s total cost is financed (and how much capital or equity the borrower is contributing).
- Both are used to set loan terms, interest rates, and equity requirements.
Why LTV and LTC Matter in Business Finance
High LTC + High LTV = Higher risk
→ The borrower is putting in less equity, and the lender has less collateral protection.Low LTV, High LTC = Could indicate a strong projected value or low-cost build
High LTV, Low LTC = Could signal market overvaluation
Lenders often use both ratios in tandem to balance cost risk and collateral risk.
Final Thought
LTV protects the lender. LTC reflects the borrower’s commitment.
Knowing both helps you understand financing strength, risk tolerance, and the capital you’ll need to contribute.