What is the LTC Ratio for the SBA 7(a) Loan?

If your business plans include taking out a commercial real estate construction loan, you’ll want to familiarize yourself with the Loan to Cost (LTC) ratio and how it impacts your financing. Lenders use the Loan-to-Cost formula as a means to determine how much risk they are taking on when underwriting a commercial construction loan.

 LTC ratio SBA 7(a) loans

Factors that Make up the LTC Ratio

The loan-to-cost ratio is determined by taking the total amount you want to borrow for your construction loan and dividing it by the total acquisition, construction/renovation costs.

The mathematical formula looks like this:

LTC Ratio = Desired Loan Amount/Construction Budget

The LTC ratio is only used to calculate funding during the construction phase of the project.

How Lenders Determine the Maximum Amount You Can Borrow

A commercial real estate construction loan is similar to other types of financing a business owner would seek from a lender. You apply for the amount of funds you need for your project; the lender expects you to have a certain personal “stake” in the project.

You can expect the bank to require you (or your business) to contribute 20 percent to the project. If you are looking for financing above that level, it may be more challenging to find financing and you will likely pay a higher interest rate.

Borrowing Funds for Acquisition and Construction or Renovation

You may wish to approach a lender who handles commercial financing for funds for one of the following plans:

  • You want to buy land and then build on it to your specification; or

  • You wish to buy an existing property and renovate it to suit your needs

The lender will consider the cost of acquisition and the fixed costs of completing construction and renovations when deciding whether to lend you the money. The LTC ratio is only used to determine whether the loan makes sense from the point of view of financing the construction.

It doesn’t look at the amount of income your commercial property may be generating from tenants once the construction or renovations are completed. If your business isn’t leasing space to tenants, any income you are generating through your own operations isn’t included in the calculations, either. This calculation is strictly focused on whether the numbers for paying for the construction make sense from the lender’s point of view.

How to Increase LTC Ratio in your Favor

Before you apply for financing, let’s take a look at how you can get approved for the highest possible LTC.

Present Yourself as a Desirable Borrower

In order to qualify for an SBA construction loan, put yourself in the shoes of the lender: Why would a bank want to lend you the funds you are requesting? With that goal in mind, make sure that your business and personal credit records are clean.

You’ll also want to show the lender that you and your management team have business experience to draw on and a history of meeting your expenses on time.

Talk up your Choice of Location

Tell your lender exactly why you’re excited about buying that property and building on it or renovating it for your business. Your bank needs to understand why this is a quality location for you to grow your business and how the construction/renovation plans can help you get there. Then you can get into the details of your budget. If your lender can’t see the bigger picture first, you won’t be able to get them on board with how much you need to spend to make it happen.


To learn more about the SBA 7(a) loan program or to get a free quote, simply fill out the form below and one of our friendly SBA loan experts will get in touch!