For ultra- and high-net-worth individuals (U)HNWI, liquidity is often a challenge. While they have often accumulated a significant net worth and high-value assets, these individuals don’t always have a standard income structure or lots of cash at hand. However, they will often need access to significant amounts of cash quickly, and liquidity or cash flow challenges need to be solved in an instant – not sometime next month (or the month after that).
Working on the assumption that high-value assets can be used as collateral for a loan, most UHNWI suppose that borrowing will be straightforward. And to be fair, why should they think anything different? On paper, an individual with a total net worth of £20 million shouldn’t struggle to secure a loan of £2 million to invest in an opportunity or make a purchase. All too often, however, many do.
Things go awry for any number of reasons. It can be because the bank you thought would lend to your client has no appetite for the specific scenario your client wants to borrow money for. It could be that another lender is keen, but the terms they’re offering don’t align with your client’s requirements. It’s also not uncommon for your clients to baulk at traditional borrowing when they realise how time-consuming it will be to go through the application process.
The problem usually isn’t that borrowing is an impossibility for UHNWI. If your client is in a robust financial position with solid assets to use as collateral, finance will be available. Instead, the crux of the issue tends to be securing the most competitive terms and rates in the timeframe your client has available. If there is anything "unusual" about your client (i.e., they have a complex or delicate background) or they want to borrow to pursue an ambitious project, traditional loans will usually be time-consuming, complicated and challenging to arrange.
Comparatively, short-term finance is quick to arrange, and your client can often draw down funds in just one to two weeks.
(U)HNWI usually use short-term finance in one of two ways. For many individuals, it’s a comprehensive borrowing solution, allowing them to create the liquidity they need for a defined period. They borrow for a few weeks or up to around three years, and they repay the loan in full through a liquidity event or careful planning.
Alternatively, short-term finance provides a debt vehicle through which UHNWI can borrow the capital they need quickly, often to solve a problem or pursue an opportunity. Short-term finance in place, the (U)HNWI’s or their advisors can then shop the market for the most advantageous long-term loan. In this scenario, the long-term loan would usually be used to pay off the initial short-term finance, and the long-term loan would usually be paid back in instalments over several years.
Underwriting short-term loans are generally much more straightforward than for longer-term financing or "traditional" loans. The underwriting process will predominately focus on the security your client brings forward (often property or securities, although other assets are possible), what your client will do with the finance (including how aggressive their plans are) and their strategy for repaying the loan.
As long as the loan is affordable for the individual in question in terms of repayments against their current cash flow or income, elements like having little cash in the bank or low income won’t put a spanner in the works. When a wealthy individual is financially stable and has assets a net worth that supports the finance they are requesting, short-term finance is often the fastest and easiest way to get a loan.
What your client will be able to borrow will depend on the security they use and how much finance they need. If your client has particularly ambitious plans, they may be able to borrow less against their collateral, and they may pay more to be able to do so.
Whatever your client’s scenario, being open with lenders is vital. Short-term finance lenders can be open to more complex or aggressive deals and unusual scenarios that can’t be considered in other parts of the market or for different types of loans. Don’t be tempted to "outthink" lenders and present what you think they want to see from your client. There are lenders to cater to every deal, and things can move fast regardless of your client’s plans, although being transparent with lenders is crucial to ensuring you can secure finance in time.
Lastly, don’t dismiss short-term finance as inflexible. These loans can be used in various scenarios and, provided lenders are aware of borrowers’ plans, there are relatively few restrictions on how funds can be deployed. For example, short-term finance can be used to diversify a portfolio of stock, buy a property, solve a personal or business cash flow challenge, renovate or redevelop real estate, settle a personal debt, grow a business, finance projects and so on. Read more about stock-based loans (Lombard lending).
If you would like to talk through a client scenario or if you have any questions, get in touch. A broker will reach out to you to answer any queries you have and give more insights into potential options and possibilities for your client.