Loan-to-Value (LTV) in the Retail Shoe Business: What It Is and Why It Matters

By Alan Miklofsky | October 19, 2024

Introduction

In the retail shoe industry, financing plays a pivotal role in acquiring inventory, leasing storefronts, or expanding operations. One key metric lenders use when evaluating business loans is the Loan-to-Value (LTV) ratio. For retail shoe store owners, understanding how LTV works can help secure better loan terms, manage risks, and optimize financial planning.

In this article, we’ll explore how LTV applies specifically to shoe retailers—whether you’re financing new inventory, renovating your store, or expanding into new locations.

What is Loan-to-Value (LTV) in Retail?

LTV measures the ratio of a loan amount to the value of the asset being financed, such as inventory, store equipment, or real estate. This ratio helps lenders assess the risk of extending credit, particularly in industries like retail, where cash flow and asset turnover are essential.

Formula:

The formula for LTV is Loan Amount divided by the Value of the Asset. The result of that is multiplied by 100 to arrive at the %.

Why LTV Matters for Shoe Store Owners

LTV has several critical implications for shoe retailers, influencing loan approval, interest rates, and cash flow management. Here’s how it impacts both borrowers and lenders.

Impact on Retailers

1. Loan Approval and Terms: A high LTV (e.g., 80% or above) might signal risk to the lender, leading to stricter loan terms or additional collateral requirements.

2. Interest Rates: Lower LTV ratios may result in lower interest rates, reducing financing costs for inventory or expansions.

3. Access to Working Capital: Retailers with favorable LTVs may qualify for working capital loans, which are critical for managing seasonal cash flow fluctuations.

4. Inventory Turnover Risks: If financed inventory doesn’t sell quickly, the store might struggle to repay the loan, especially with a high LTV ratio.

Impact on Lenders

1. Risk Assessment: Lenders use LTV to determine how easily they could recoup losses if the borrower defaults.

2. Loan Structure: Lenders may adjust loan terms based on the type of assets (e.g., shoes, fixtures, or retail property) being financed.

3. Monitoring Asset Depreciation: Shoes, especially seasonal styles, can lose value quickly. Lenders may hesitate to offer high LTV loans on perishable or fast-fashion inventory.

Types of LTV Applications in a Retail Shoe Store

1. Inventory Financing:
   Many shoe retailers use short-term loans or lines of credit to purchase bulk inventory for peak seasons. A lender may approve up to 50-70% LTV, meaning the store must cover the rest of the cost.
   Example:

   • Loan: $40,000

   • Inventory value: $60,000

   • LTV = (40,000 ÷ 60,000) × 100 = 66.7%

2. Store Renovations or Expansion Loans:
   If a retailer takes out a loan to renovate an existing store or open a second location, the LTV will depend on the appraised value of the leasehold improvements or property.
   Example:

   • Renovation loan: $100,000

   • Value of improvements: $125,000

   • LTV = (100,000 ÷ 125,000) × 100 = 80%

3. Real Estate Purchases:
   If the retailer owns the property, the LTV on a mortgage will influence loan terms and monthly payments. Lenders may allow up to 70-80% LTV for commercial real estate.

Strategies for Managing LTV in a Shoe Store Business

1. Maintain Strong Inventory Control

Carrying excess or unsold inventory increases financial risk. Tight inventory management ensures that loans are used efficiently and LTV remains favorable.

2. Increase Down Payments or Equity

Contributing more cash upfront for major purchases (like equipment or renovations) lowers the LTV and reduces loan costs.

3. Negotiate Vendor Terms

If suppliers offer extended payment terms, a retailer can reduce reliance on loans, improving the business’s overall financial health and LTV.

4. Refinance Existing Loans

If the store's value increases (e.g., improved foot traffic or expanded operations), refinancing an existing loan can lower the LTV and provide access to better terms.

Lessons from a Hypothetical Scenario

Scenario:
A local shoe retailer, "Stride Footwear," plans to expand by leasing a second storefront for $150,000 in renovations. The owner applies for a $120,000 loan, resulting in an LTV of 80%. However, due to the higher risk associated with retail expansions, the lender offers the loan at a 10% interest rate.

If the owner had negotiated vendor contributions to cover $20,000 of the renovation, the loan amount would have dropped to $100,000, resulting in a 67% LTV and a lower interest rate. This highlights how reducing the LTV can improve financing terms.

Real-Life Example

COVID-19’s Impact on Retail LTV Ratios
During the pandemic, many retailers found themselves with excess inventory that lost value quickly due to lockdowns and decreased demand. Shoe stores in particular faced challenges with unsold seasonal stock, which led to higher LTV ratios on inventory loans. Some businesses were forced to sell products at a loss or default on loans, underscoring the importance of managing LTV carefully, especially during uncertain times.

Conclusion

In the retail shoe business, the Loan-to-Value (LTV) ratio is a critical metric that influences loan approvals, financing costs, and business flexibility. Whether financing inventory, expanding locations, or upgrading stores, understanding LTV helps retailers balance risk and opportunity.

By managing LTV through careful planning—such as larger down payments, strong vendor relationships, and tight inventory control—shoe store owners can secure better loan terms and ensure sustainable growth.