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.

Key Benefits of Borrowing

1. Leveraging Investments
Borrowing allows your assets to remain invested and potentially grow. Selling investments to fund short-term needs can trigger capital gains taxes, while borrowing against your portfolio preserves your growth potential.

2. Preserving Liquidity
Debt can provide the cash needed for large purchases while keeping your cash reserves intact for emergencies or other opportunities.

3. Tax Efficiency
In some cases, interest on debt may be tax-deductible. For details on investment interest deductibility, see the IRS - Investment Interest Expense.

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.

Scenarios Where Borrowing Can Make Sense

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.

Borrowing Options for High-Net-Worth Individuals

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.

Planning for Repayment

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.