When it comes to protection, just saying the collateral is worth $1M isn't enough, of course.
❗️ If a borrower defaults, what the business paid for an asset or what it’s worth on the books doesn’t really matter. What matters is how much we can get by selling it.
That’s why we look at the asset type, its condition, liquidity, the secondary market, and how much we might have to discount the price to sell it. The details depend on the business and the type of collateral it provides.
For some projects, we also estimate a more conservative liquidation value.
Next, we look at the LTV (Loan-to-Value) ratio. It shows how large the loan is compared to the value of the collateral.
For example, if the loan is $400,000 and the collateral is valued at $650,000, the LTV is approximately 62%.
The lower the LTV, the bigger the gap between the loan amount and the collateral’s value.
But LTV alone doesn’t guarantee repayment. We also check whether we can seize and sell the asset, whether anyone else has a claim on it, and how much we might recover in the worst-case scenario.
So, the most important thing for us is how much money the asset could bring back to investors if the business’s main cash flow dries up.
⚖️ Do you check the LTV before investing? What LTV feels acceptable to you, and at what point would you walk away?
😉 Share some of your secret tactics in the comments!