The Advantage of Lower LTV Loans
Due to the regular ups and downs that business owners sometimes experience, obtaining conventional financing for their capital needs is not always an option, and businesses will then turn to private or hard-money lenders for their financing. Although this route is more expensive than conventional financing, there are ways that borrowers can reduce the costs associated with hard money loans, and come out on top as a result.
One of the most overlooked ways to reduce the costs associated with private money loans is to voluntarily limit the amount of equity business owners borrow against their properties. Lower loan amounts automatically reduce the lifetime cost of the capital borrowed, but they may provide savings in other ways as well.
Private money lenders tend to price their product’s fees and interest rates according to the risks associated with the loan. A loan that is using more of a property’s equity is riskier, and will typically be priced accordingly. Because lower loan-to-value (LTV) loans present less of a risk to the lender, they will usually be more competitively priced.
Having a lower LTV loan can also increase the number of loan options available to a business. Not all lenders are comfortable making higher LTV loans, so high LTV borrowers have limited loan options to choose from. Having access to a wider market of loan choices thus generally improves the borrower’s chances of finding a less expensive loan, often with features that help them achieve their financial goals.
Lenders considering lower LTV loans may waive certain requirements, such as income and debt service documentation, that can further complicate the process of closing a loan. In cases where such documentation is still required, the lender may be more lenient on the requirements than they would be on a higher LTV loan. In addition, lenders may also extend longer loan terms on low LTV loans, thus alleviating both the borrower’s need to secure additional or replacement financing sooner, and/or the need to capitalize new fees and points into their loan balance.
There are of course sometimes business circumstances that require a borrower to maximize the amount of equity they are taking out of their property, and hard money loans in such cases can certainly be useful. Before you go that route, however, take a good hard look at your business plan, and evaluate whether you can’t make do with a lower LTV loan. The savings you might realize through this strategy may actually be far more significant to you in the long-run.
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E. Paul Whetten
Paul Whetten is the Managing Executive of American Life Financial, a private money lender based in Mesa, Arizona. He has 10 years of experience in enterprise management and small business accounting, and over 14 years of experience in the financial services industry. Paul holds a Master’s degree in Administration from Northern Arizona University and is an adjunct professor of business at Mesa Community College.