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Leveraging credit to build further wealth

The timing for tapping into credit is good right now, as business valuations have gone up post-2008 and interest rates are at historic lows

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Among the many business tools and resources that are available to affluent individuals and families, there is one that is sometimes hiding in plain sight — the ability to leverage their credit as a business tool.

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Deploying the strength of a successful business to gain credit is a significant and important strategy for high- and ultra-high-net-worth families who want to build portfolios and enterprises or pursue specific goals.

True, increasing one’s credit may seem counterintuitive for people with ample assets such as successful businesses, because it means going to the other side of the balance sheet and assuming liabilities.

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But the timing for tapping into credit is good right now for business owners, says Yannick Archambault, partner and national family office lead, KPMG Enterprise.

“Over the last 12 years [since the recovery after the 2008 recession] business valuations have gone up for the most part. So many businesses are worth a lot more than they were, and this has continued even since the pandemic,” he says.

“If you have a lot of assets, it gives you opportunity on the credit side. Most business owners will understand this because they have used credit to advance their businesses.”

Credit is particularly attractive right now because interest rates are at historic low levels and will likely stay low for a while. On July 14, the Bank of Canada held its key overnight lending rate at a rock bottom 0.25 per cent, and said it is unlikely to raise rates before the second half of 2022, and maybe later.

Those who leverage their businesses should nevertheless be strategic, says Mark Auger, enterprising family office advisor and co-founder and chief executive officer of Crysalia Inc., based in Montreal.

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“Credit can be used for many reasons, and it’s not just because interest rates are low right now,” he says. Even for the ultra-wealthy, it’s important to have a clear idea about why one wants to boost credit, and to look for specific objectives, he says.

For example, if a loan is structured properly, “the interest can be tax deductible,” Auger says.

Even when advising sophisticated high-net-worth clients, family offices need to ensure that those who take on credit understand the potential downsides.

“You have to make sure that the person is comfortable with the risk. The appetite for risk is different for different individuals,” he says.

While risk tolerance is important for anyone who borrows against an asset, the needs and uses of credit for high-net-worth families are not necessarily the same as for other borrowers.

It can effectively unlock value and create liquidity based on existing holdings — and often the financing is very efficient, cost-effective and flexible in structure compared to more traditional sources.

Marian Major, RBC Private Banking Canada

It is common for many Canadians to use credit for education, a car or a home; high-net-worth families may do this, too, but often they seek credit when they see an opportunity to invest in a new venture or acquire or grow a business.

High-net-worth clients are often driven by an entrepreneurial spirit, says Marian Major, director, credit structures with RBC Private Banking Canada, who works with executives and business owners in Calgary.

Leveraging wealth often makes sense for the affluent because, “It can effectively unlock value and create liquidity based on existing holdings — and often the financing is very efficient, cost-effective and flexible in structure compared to more traditional sources,” she says.

Family offices can offer valuable help for those who seek to leverage their businesses in several ways, Archambault says. They can help them find the most comfortable balance between risk and return, for example.

Family offices can also help families smooth over differences that family members might have over whether to access credit and how much.

“We work with family members that may have divergent views. Some might like leverage, some might not. We look for the intersection where everyone can be comfortable,” Archambault says.

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