Quick Summary
Understand LVR: Loan-to-Value Ratio (LVR) is the percentage of an asset’s price that you borrow. A deposit directly lowers your LVR, which reduces the lender’s risk.
Unlock Better Rates: A lower LVR (thanks to a bigger deposit) often gives you access to lower interest rates, saving you thousands over the life of the loan.
Boost Your Approval Chances: A strong deposit demonstrates financial discipline and reduces the lender’s exposure, significantly increasing your likelihood of getting approved.
No Cash? No Problem: You don’t always need cash for a deposit. You can often use the equity in existing unencumbered (fully owned) business assets or property.
When you’re looking to finance a major asset—a new truck, commercial property, or a vital piece of machinery—it’s easy to focus on the headline interest rate or the monthly repayment. But one of the most powerful tools you have at your disposal happens right at the start: the deposit. Many business owners see a deposit simply as a barrier to entry, the minimum amount of cash they have to scrape together to get the deal done.
This is a mistake. A deposit isn’t just a down payment; it’s an investment in the quality of your loan. A strong deposit can fundamentally change the deal you get from a lender, saving you a small fortune in the long run and setting your business up for greater financial success. In this article, we’ll explain how it works and what you can do, even if you’re short on cash.
The Magic Number: Understanding Loan-to-Value Ratio (LVR)
What is LVR?
- Loan-to-Value Ratio (LVR) is one of the most important metrics in lending. It’s the percentage of the asset's purchase price that the loan covers.
- The formula is simple: LVR = (Loan Amount / Asset Value) x 100.
How Your Deposit Changes the Equation
Every dollar you contribute as a deposit directly reduces the loan amount and, therefore, the LVR.
Example: You’re buying a $100,000 piece of equipment.
- With a $10,000 deposit (10%), your loan is $90,000. Your LVR is 90%.
- With a $20,000 deposit (20%), your loan is $80,000. Your LVR is 80%.
Why Lenders Care So Much About LVR
From a lender’s perspective, a lower LVR means lower risk. If you were to default on the loan, they would have to sell the asset to recover their money. A lower LVR provides them with a larger buffer against potential loss if the asset’s value depreciates. More buffer for them means a better deal for you.
The 3 Key Benefits of a Larger Deposit
Benefit 1: A Higher Chance of Loan Approval
A significant deposit shows the lender two things: firstly, that your business has the financial discipline to save and manage its cash flow, and secondly, that you have “skin in the game.” You are sharing the risk. This makes you a much more attractive borrower and can be the deciding factor between a ‘yes’ and a ‘no’, especially for newer businesses or those with a less-than-perfect credit history.
Benefit 2: Access to Lower Interest Rates
Lenders often have tiered interest rates based on LVR. A loan at 90% LVR might attract a standard rate, but dropping to an 80% LVR could move you into a lower pricing tier. This small percentage difference can add up to thousands of dollars in saved interest over the loan term.
Benefit 3: Lower Ongoing Repayments
This is the most obvious benefit, but it’s still crucial for cash flow. By borrowing less, your principal and interest repayments will be lower each month. This frees up vital working capital that you can use to invest in other areas of your business, like marketing, inventory, or staff. Considering options like a Commercial Balloon Refinance can also help manage repayments, but starting with a lower principal is always the best strategy.
How a 20% Deposit Saves You Money on a $100,000 Asset Loan (5-Year Term)
Metric
20% Deposit
10% Deposit
Deposit Amount
20% Deposit
$20,000
10% Deposit
$10,000
Loan Amount
20% Deposit
$80,000
$90,000
Assumed Interest Rate
20% Deposit
7.5% p.a.
8.0% p.a.
Monthly Repayment
20% Deposit
~$1,604
~$1,825
Total Interest Paid
20% Deposit
$16,240
$19,500
No Cash Deposit? You Still Have Options
Using Equity in Existing Assets
This is a powerful but often overlooked strategy. If your business owns other assets outright (they are “unencumbered”), you can use them as security for 100% of the finance, effectively creating a “no-deposit” loan for the new asset.
How It Works in Practice
In some cases, a lender may secure the loan against both the new asset you are buying and an existing asset. This is known as cross-collateralisation. A good broker can advise on the pros and cons of this structure and help you determine if it’s the right move for your business.
Cross-Collateralisation
This trend is critically important for WA business owners. It signifies that the broker community is investing heavily in developing deep expertise in the specific financial needs of SMEs. A diversified broker understands the nuances of products like chattel mortgages for trucks and earthmoving equipment, specialised equipment finance for manufacturing machinery, and the complex structuring required for commercial property purchases. This specialisation enhances competition and choice for SME clients, providing them with a far greater range of sophisticated funding options than what is typically available from a single bank.
Frequently Asked Questions
Is it possible to get a 100% LVR or "no-deposit" loan?
Yes, but usually only for very strong applicants (e.g., long trading history, excellent credit) or by using equity in another asset as security.
What is a typical LVR for commercial property?
Most lenders will go up to 70-80% LVR for standard commercial property.
What is a typical LVR for vehicles and equipment?
Lenders will often go up to 100% (or even slightly more to cover insurance) for new assets for strong businesses. However, providing a deposit will still get you a better deal.
Does my personal savings count towards a business loan deposit?
Yes, you can introduce personal funds into the business to use as a deposit. Your accountant can advise on the best way to structure this.
Does a trade-in count as a deposit?
Absolutely. The value of your trade-in directly reduces the loan amount, functioning exactly like a cash deposit to lower the LVR.
Will a bigger deposit help me get approved with bad credit?
Yes, it can make a significant difference. A 20-30% deposit substantially reduces the lender’s risk, making them more likely to consider an application they might otherwise reject.
Is there a deposit that is "too small"?
Some lenders have minimum deposit requirements (e.g., 5-10%), but it varies. The smaller the deposit, the more scrutiny your application will face.
Does the age of the asset affect the LVR?
Yes. Lenders are often more conservative with older, second-hand assets and may require a larger deposit (lower LVR) than for a brand-new asset.
How does a balloon payment affect LVR?
A balloon payment affects the loan structure and repayments but doesn’t change the initial LVR, which is calculated at the time of purchase.
Should I use all my cash savings as a deposit?
Not necessarily. It’s crucial to maintain a healthy level of working capital in your business. A broker can help you find the right balance between a strong deposit and retaining cash reserves.
Can a broker help me use the equity in my home as a deposit?
Yes, this is a common strategy. A broker can help you navigate the process of leveraging your residential property equity for business purposes.
Building Your Deposit: A Proactive Strategy
Create a Dedicated Savings Account
Treat your future deposit as a non-negotiable business expense. Set up an automatic transfer to a separate high-interest savings account each week or month. Even small, consistent contributions add up significantly over time.
Forecast Your Asset Needs
Don’t wait until a vehicle breaks down to think about its replacement. Proactively forecast your major asset purchases 12-24 months in advance. This gives you a clear savings goal and a timeline, turning a panicked purchase into a planned investment.
Talk to Your Broker Early
Don’t wait until you’re ready to buy. Engage a finance broker months before you need the funds. We can review your financial position, identify opportunities to leverage existing assets, and provide a clear picture of what deposit you should be aiming for to secure the best possible deal.
Want to know how to structure your next asset purchase for maximum savings? Contact Varlo Finance to create a deposit strategy that works for you.
Think of your deposit as the foundation of your loan. A weak foundation might hold up, but it will be more expensive and less stable in the long run. A strong foundation—built with cash, a trade-in, or equity from another asset—allows you to build a better, cheaper, and more secure financial structure.
By understanding the power of LVR and planning your asset purchases in advance, you can shift from being a price-taker to a price-maker. You put yourself in the driver’s seat, with lenders competing for your business with better rates and more favourable terms. That’s a powerful position for any WA business to be in.