Investing in financial markets on a leveraged basis is often viewed as an unnecessary risk that should be avoided at all costs. Yet in many other situations, leverage is widely accepted. When buying a home, it is generally assumed that a mortgage is used to enable the purchase. When buying a share in a company, we become part owner of a business that is likely to be leveraged if it has borrowed money to finance its operations.
You may ask, is using leverage not inherently risky? We view the use of leverage in financial markets much like driving a car. While it brings many benefits, it should be employed prudently and consciously. Sometimes we can drive a little faster, while at other times circumstances require us to slow down – the objective is always to get home safely.
Leverage can be used in its very basic form to gain financial flexibility and to make use of your capital as efficiently as possible and in a way that provides the best possible outcome. This is why tailor-made Lombard loans, which provide a flexible and efficient solution, can be a useful and powerful tool to support you in attaining your investing, financing, or hedging objectives.
Financial flexibility is a requirement in today’s fast-moving world
Investment-related opportunities and financing requirements can arise at any time – sometimes they are expected, and at other times they come out of the blue, so to speak. For both cases, tailor-made Lombard lending solutions can help increase your financial flexibility, whether you are an individual investor or a corporate entity. Lombard loans are a simple, quick, and convenient way to cover your liquidity needs by borrowing against your bankable assets booked with the bank.
A Lombard loan can be considered a flexible credit facility. The cash received under a Lombard loan can be used for multiple purposes, which you may or may not adjust during the course of the borrowing period. In other words, the bank grants the Lombard loan purely based on the existing portfolio booked with and pledged to the bank, and not based on the intended or actual purpose(s) mentioned below (e.g. to make an investment or to borrow today in view of future incoming cash flows).
Lombard-loan based lending solutions can be as diverse as your needs
While each personal situation varies, a Lombard loan can help you increase your financial flexibility to ensure that you have the cash you need to meet your financial requirements and take advantage of investment-related opportunities.
Lombard loans for investment-related opportunities
- Amplify returns: You wish to amplify the returns of your portfolio or generate additional interest and/or dividend income.
- Income generation: You wish to generate additional income by gaining exposure to securities whose yields exceed any financing costs.
- Diversification: You have the majority of your assets in a few concentrated holdings. While you aim to retain these positions, you want to diversify the portfolio beyond these holdings.
- Short-term trading opportunity: You can take advantage of short-term trading opportunities without compromising your long-term investment strategy.
- Tactical fine-tuning of your portfolio: You have the knowledge and experience to engage in active trading in order to speculate on sharp price movements in an asset or hedge an existing portfolio position instead of selling it.
- Borrow in view of future cash flows: You expect to receive significant funds in the coming months. However, you wish to profit from an investment opportunity today.
- Currency hedging: You wish to make an investment in an asset that is not in your base currency. By opening a respective foreign exchange forward or by taking out a loan in the investment currency to invest in the asset, you can neutralise the currency exposure.
Lombard loans for financing-related purposes (individual or commercial)
- Bridge financing: You have a short-term liquidity requirement that you need to meet.
- Acquisition: You are looking to make a major acquisition which you either have to pay for in full or for which you have to make a down payment.
- Property financing: You are looking to purchase or refinance a property using the proceeds from a Lombard loan, a mortgage, or a combination of these two financing types.
- Business - growth capital: You wish to grow your business and have found a third party willing to finance the expansion. However, you are in need of additional funds today, while the money from the third party will only be provided in the medium term.
- Business - commercial transaction: You are a business owner actively engaged in commercial activities (bridge loan, payment guarantee, etc.).
Mind the gap - beware of the risks
With a Lombard loan you are exposed to both the greater fluctuations in the value of your investment and the fluctuation in the value of your bankable assets, which are used as the collateral for the Lombard loan, and are themselves subject to market, credit, and liquidity risk (unless you provided cash).
When considering a Lombard loan for your investment portfolio, we advise you to look at your overall financial situation, including any possible tax consequences. Please also consider your risk profile for your total assets, including those held at other financial institutions, as well as your overall investment objectives. In short: ‘To borrow or not to borrow? Borrow only if you can repay!’
In conclusion, Lombard loans can be used as a tool kit to enhance your financial flexibility. By borrowing against your bankable assets, you can get access to additional funds in a simple, quick, and convenient way. You can use these to benefit from investment-related opportunities or to satisfy your financing requirements. In short, you can use the funds at your discretion and even change the purpose during the tenor of the Lombard loan. In the process it is vital to use Lombard loans prudently and consciously in order to successfully attain your investing, financing, or hedging objectives.
How To Invest
Financial subjects can be complex in nature. Our ’How to Invest’ series aims at explaining them - one step at a time.