Liquidity | Newport Beach | Elevate Financial & Insurance

Lending Strategy

How Liquidity Affects Lines of Credit

Liquidity is a term that describes a company’s or individual’s ability to pay its debt obligations. When lenders evaluate a borrower, they are primarily concerned with your ability to repay the loan. With a business loan or line of credit, it’s the company’s finances that matter.

Some loans and lines of credits use investments, insurance, or an asset as a collateral for the debt. While your ability to repay is still important, that’s not the only consideration for the lender. For example, an investment-backed line of credit will use the loan-to-value ratio to protect the lender from a default.

What’s a Loan-to-Value Ratio?

A loan-to-value ratio is the amount of the loan compared to the value of the collateral. For example, if you borrow $50,000 to purchase an asset that’s worth $100,000, the loan-to-value ratio is 50%. This means you’re borrowing only half the amount the asset is worth.

An acceptable loan-to-value ratio depends entirely on the lender and the type of asset backing the loan or line of credit. A lower ratio may give your more favorable terms, such as a lower interest rate.

How Does Income Affect Lines of Credit

If you apply for a non-purpose line of credit, your income is the most important factor for the lender. For a business loan, they will consider the company’s earnings to determine how much credit you will receive. If you need a line of credit backed by an investment, asset, or insurance, your lender will primarily use the loan-to-value ratio to determine your eligibility.

Your liquidity ratio has to do with your current income and debt payments. It’s calculated using your income and your short-term debt payments. A lower liquidity ratio is better, because it means less of your income is used to serve existing debt payments.

Types Of Lines of Credit

A line of credit is revolving credit. You can apply for a line of credit and use some or all of the money at once. You can also keep a line of credit open to pay for future expenses. If you use a line of credit to purchase assets or investments, they can be a financial tool to increase your income.

Here are examples of different lines of credit:

Non-purpose line of credit
Investment-backed line of credit
Insurance-backed line of credit
Line of credit for an asset

When you apply for a non-purpose line of credit, your liquidity ratio is the most important consideration. If the line of credit is paired with an asset or collateral, the loan-to-value ratio becomes the focus for the lender.

Frequently Asked Questions

To qualify for a line of credit, you will need to provide some financial information. Depending on the type of credit you desire, we’ll calculate your liquidity ratio or loan-to-value ratio or both. For a business line of credit, we need to see the company’s earnings. For an asset-backed line of credit, you also need to provide information about the asset.

A lower loan-to-value ratio improves your chances of credit approval, because it means less risk for the lender. To lower your loan-to-value ratio, consider using savings or other assets to put toward the purchase of the investment.

With a line of credit, you can purchase an asset or investment you couldn’t otherwise afford for your company. The right asset or investment can help you improve business operations. You can also purchase assets for their potential to increase in value. We understand that you have to invest money to earn more money, and a line of credit can help you take that next step.

Work with Our Financial Experts

If you’re looking for a line of credit backed by investments or without a specifically stated purpose, we can help. We’ll talk to you about your liquidity and loan-to-value ratios and determine how much credit we can extend. Our favorable interest rates can help you meet your financial goals. Call us today to make an appointment.

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