When borrowing can be a smart strategy

Borrowing can offer flexibility and align with long-term financial goals.

When it comes to personal finance, conventional wisdom says the best way to live is debt free. There are many important reasons why this is tried and true, but for high-net-worth individuals, lending can be an optimal way to access cash in the near term without sacrificing long-term gains on your assets.

The most successful companies in the world all have a debt side of their balance sheet that they can use to their advantage – something that individuals can do as well. It may seem counterintuitive to incur debt when you have the means to access cash in other ways, but doing so can have advantages depending on your unique circumstances. Some benefits include:

• Leveraging investments: By taking on debt, your assets remain invested and able to potentially grow
• Preserving liquidity: Maintaining liquidity by using debt for large purchases can help to ensure that your cash reserves remain intact for other opportunities or emergencies.
• Tax efficiency: By leveraging your investments, you don’t incur capital gains taxes, and in some cases, interest on debt may be tax-deductible, offering additional financial benefits.

For high-net-worth individuals in particular, debt can offer greater flexibility and opportunities for investors. Used strategically, debt can enhance your financial position, and when managed wisely it can be a powerful tool, rather than a burden.

There are a number of scenarios in which borrowing options may be a good way to help you achieve your goals. Ask yourself, if you found yourself in an immediate need for significant cash – such as, if something happened to your home or family – how would you access that cash? This may be a situation in which having a line of credit available in advance and incurring debt in the short term makes sense within the comprehensive picture of your long-term financial goals. When the need arises, you can give yourself the time to the decision that best fits your situation and pay the emergent expense immediately, while allowing your asset base to continue to grow and address that immediate need without disturbing your long-term plan.

But these aren’t strategies to consider only in emergency situations. The kind of life changes that call for celebration – such as investing in real estate, expanding your business, supporting adult children in their next steps such as marriages or home purchases, or luxury purchases such as a car or boat – may also present opportunities to utilize borrowing strategies.

While a variety of borrowing options exist that high-net-worth individuals may find advantageous in different scenarios, here are a few examples:

Securities-based lending

Securities-based lending or a securities-based line of credit (SBL) uses as collateral your existing eligible securities, giving you increased borrowing power without the need to sell securities and disrupt long-term investment plans. Securities-based lending can also be helpful if you’re a business owner and have a new cash flow need to help grow your business, allowing you to borrow against your existing assets. 

Tailored lending

Tailored lending allows you to use collateral such as control/restricted securities, hedge funds, exchange funds, American depository receipts (ADRs), non-investment grade bonds and over advances on typical SBL collateral to borrow.

Mortgage lending

When you’re thinking about purchasing a home – like a new home or dream vacation home for yourself, or home for your grown children – mortgage loan may be a smart strategy, offering many of the benefits mentioned above. And mortgage lending isn’t one size fits all – there are a number of loan options and strategies. For instance, a pledged asset mortgage allows you to pledge a portion of your investment portfolio as collateral in lieu of a traditional cash down payment, allowing you to keep your assets invested as is.

When exploring any borrowing options, one thing to consider is your plan for repayment. A thoughtful strategy can help you take advantage of borrowing in the way that best meets your needs and goals without needing to sell other assets. When leveraged appropriately, these options should allow your assets to continue to grow in the long term in a way that supports you and your family’s overall financial goals.

A Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect SOFR rates (or any successor rate thereto) that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account.

Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, member FDIC.