Using Credit to Preserve and Build

If you own substantial liquid assets, either in a business or in your investment portfolio, you might not see any reason to borrow money. Why take out a loan when you already have funds available to you?

There are a number of situations, however, where there could be a distinct advantage to utilizing a line of credit, even if you have sufficient personal resources available:

  To cover large or unexpected personal expenses;
  Less costs than Credit Card interest rates;
  To help grow your business without incurring additional expenses;
  To take advantage of an investment opportunity

Though it may seem counterintuitive, borrowing can be beneficial to your overall wealth plan and investment strategy.

Covering the Big Thing

Dealing with large or unexpected expenses can be challenging, whether you need to pay for a major tax bill, an emergency medical expense or fund an investment opportunity. Your first inclination may be to draw from your savings or sell off some investments to raise the funds. While this may seem straightforward, there can be hidden costs that aren't immediately obvious to you.

By liquidating investments, you are likely to incur brokerage fees and may expose yourself to additional tax consequences in the form of capital gains. Right away, the transaction is costing you money. And it doesn't end there. By liquidating investments, you also risk throwing your asset allocation off balance, which can impact your long-term wealth plan.

Studies have shown that over 90% of a portfolio's variance of investment return can be attributed to how assets are spread across different asset classes. A properly tuned asset allocation ensures that you're able to pursue the level of growth you want while exposing yourself to a level of risk you are comfortable with — and selling investments can upset that balance.

Furthermore, rebalancing may require you to sell off more assets in order to get back to your desired asset allocation, thus incurring more fees and capital gains tax. On top of all this, you have to consider the opportunity cost of taking money out of the market — you'll miss out on any potential growth that you would have enjoyed had the money remained invested.

Leverage is Key

Rather than selling investments, you may want to consider using your portfolio or other assets as collateral for a loan. That way, you can borrow against your assets while allowing them to continue to generate use and returns, which could more than offset the overall cost of the loan given the current interest rate environment is still relatively low.

This strategy isn't just for unexpected or obligatory expenses. You can use it to pay for major purchases, as well.For example, you may have your eye on an expensive work of art or the vacation home you've been dreaming about, but don't have the cash on hand to buy it. Perhaps you're expecting a big bonus in several months, and are worried that you'll miss out on a unique opportunity if you wait. If that's the case, you could leverage your portfolio to secure a bridge loan that provides the cash you need immediately, allowing you to make the purchase now and repay the debt later when your cash flow improves.

Leverage for a Business

You can also borrow against your personal investment portfolio to help your company make an acquisition, purchase equipment or buy real estate to house the firm and the like.

By leveraging the portfolio, higher interest rates for business loans costly legal and accounting fees closing costs etc can be avoided.

As a result, as the company repays the loan more profits are enjoyed by the owner. And because the investment portfolio is fully invested in the market, there is the ability to capitalize on portfolio positions.

Capitalizing on Opportunities

There may be times in which you have a limited window to take advantage of opportunities. For instance, let’s say you’re a manufacturer and your supplier’s costs are significantly reduced. You’ll want to take advantage of that limited-time offer, but you might not have the cash to afford it. With a business line of credit, you won’t miss out on a great opportunity to save money in the long-run!

Mergers and Aquisitions

Mergers and acquisitions (M&A) involve extraordinary groundwork before even the initial preliminary bid is made. This includes proper valuation, financing method and structure, and timeline of the transaction. The buyer hires an M&A advisor or an investment bank to carry out the analysis in the form of a fairness opinion. An important part of the analysis includes calculating the increase in debt and the resulting solvency and cash flow issues. This is covered under credit evaluation and is as important as valuation.

A large number of transactions in M&A or even other expansions involve debt. The rationale being that the debt is usually cheaper than the equity and also provide tax benefits. While the use of debt increases the return for the equity holders and the owners, it can also enhance losses and may lead to bankruptcy.

Seeking credit advice can help you prepare for downswings, emergencies and seek out new opportunities in the markets. Whether you’re feeling bullish or bearish, enlisting the guidance can help you manage your assets with your best interests in mind.