For high-net-worth investors with business interests, tapping their credit “can effectively unlock value and create liquidity based on existing holdings,” says Marian Major, director, credit structures with RBC Private Banking Canada, who works with executives and business owners in Calgary.
And now is a good time for business owners to consider this strategy, says Yannick Archambault, partner and national family office lead, KPMG Enterprise.
Business valuations have generally gone up since the 2008 recession, and this has continued for many during the COVID-19 pandemic, he says.
And credit is particularly attractive right now because interest rates are at historic low levels.
Leveraging credit to build further wealth
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But those who leverage their businesses should be strategic and understand their goals, as well as the potential downsides, says Mark Auger, enterprising family office advisor and co-founder and chief executive officer of Crysalia Inc., based in Montreal.
Here are six things to keep in mind when considering tapping into business credit.
If you’re putting forward assets to obtain financing or funding, what’s the plan? Is it to expand an existing business? Buy a new one? “In the end it comes back to a SWOT analysis — what are the strengths, weaknesses, opportunities and threats related to what you want to do with the funds,” says Archambault.
Using credit for business can be creative and productive if it is well thought out. Credit can be used for business purposes ranging from acquiring real estate or new equipment, to managing cash flow or reorganizing and consolidating earlier borrowing to pivoting the business, for example by turning a bricks-and-mortar company into a digital one.
Interest rates are low so now looks like a good time to go for credit. But timing can be deceptive. What if there is another shock to the economy like the COVID-19 pandemic? What if things change unexpectedly? Leveraging your business to buy office buildings may have looked like a great idea in January, 2020, but not so great in March when the lockdowns began and everyone started working from home; as more people get vaccinated it may be a good idea again. It is important to think ahead.
Leveraging part of an ultra-high-net-worth business empire is not the same as taking out a loan — it is complicated. There can be many moving parts, such as different types of assets to be pledged, and different currencies and repayment terms. Advice from firms that employ professionals with varied areas of expertise, such as family offices, can help tap into the best professional advisors to work through and spell out all the terms, conditions and contingencies.
Some business borrowing is deductible — it is important to work with a tax expert who can not only help with the individuals involved in the business, but also family members to determine the maximum tax efficiency.
Credit is an obligation, so it is important to plan for what happens if the obligation falls to other family members, whether through death or business succession. It is important to think not only about what the credit will be used for, but also what happens after that.