Loan-to-value ratio (LTV)

LTV is the collateral-side counterpart to debt service coverage ratio. Where DSCR asks whether cash flow can carry the payments, LTV asks how much a lender is actually willing to lend against a specific asset if it ever had to seize and sell that asset. The two constraints operate independently, and either one can be the reason a requested loan amount gets reduced.

Why acquisition loans get split by asset type

A single acquisition loan is rarely underwritten against one blended value. Real estate typically supports the most advance because it resells reliably; equipment supports less because it depreciates and has a thinner resale market; goodwill and other intangible value support the least, because there is nothing to repossess if the deal fails. Lenders commonly apply a separate advance rate to each category and add them together, rather than lending a flat proportion of the total purchase price.

What this means for structuring an offer

A purchase price that looks fully financeable on paper can still fall apart once each asset class is appraised on its own and a conservative advance rate is applied to it. The resulting gap between what the lender will advance and what the deal costs is exactly what a larger down payment, a vendor take-back, or a subordinated lender is used to close.

What commonly trips buyers up

• Assuming the loan will be sized against the purchase price rather than an independent appraisal of the underlying assets
• Treating goodwill as collateral the way a conventional lender treats a building or a piece of equipment
• Not realizing that a single blended acquisition loan is often three separate LTV calculations stitched together
• Discovering the appraisal shortfall after a purchase price has already been negotiated and signed as a letter of intent