To borrow for an investment is not as obvious to everyone as it should be. To borrow money to finance a car purchase is for most people a matter of course. It is perceived as a risk-free loan even though we know that the value of a new car drops like a stone as soon as it rolled out of the car hall.
The value of the new car is, after a few years at best, half and during the time we own it the expectation is that we will only have expenses in the form of interest on the loan, taxes, fees and unforeseen repairs.
With the exception of home loans, most Swedes associate blank loans with expenses and losses. Perhaps that is why many are skeptical and experience it as risky and even suspicious that borrowing money for an investment even if the expectation here is that the loan will generate regular income and profits.
- investment loan
- Blank loans for investments
- Borrowing to invest in shares?
- Borrow money for investment in business
Virtually all successful wealthy people have become rich with the help of other people’s money. They have borrowed money to do business and investments.
In fact, the fastest and for many only way to get rich is to borrow money for an investment.
Blank loans for investments
This creates a holding of equity funds worth SEK 400,000.
The risk is of course that the value of the equity fund is halved. Then everything is lost and only one loan of SEK 200,000 remains. Therefore, choose a stock fund with appropriate risk / profit potential.
During the investment, interest on the loan is paid. 30% of the interest cost is returned to the tax each year, while profit tax is only paid when the fund has been sold.
Increased return on loans
A good loan that is used to buy equity funds, shares or other investments can be an effective way to increase the potential return. Loan-based investments naturally entail a greater risk than financing an investment entirely with their own money.
Investing with borrowed money is also called investing with leverage. As long as the investments increase at a rate that is higher than the borrowing costs, it can make money.
If the investment loses in value, the loan must still be repaid plus interest. To rely solely on the return on the investment (eg dividends) to cover the borrowing costs is a strategy that quickly collapses if the dividend is reduced or absent entirely.
Borrowing money for an investment can be an effective strategy, but it is far from a method that suits everyone. However, the expectation of an investment is always positive and, unlike a car loan or loan for the purchase of capital goods, it is an exception if the long-term outcome results in a loss.
No car owner provides a depreciation, even the investor should be mentally prepared for unforeseen events to always occur.
Borrowing to invest in shares?
The largest listed Swedish companies can borrow 70% (a higher equity fund can be borrowed). This means that with the help of a blank loan of SEK 200,000, it is possible to buy shares with a loan from a stockbroker for over SEK 600,000.
The price of shares moves up and down and you risk losses if they fall in value. If the value of your shares falls, more money must be postponed or a forced sale takes place.
How do I handle the risks of leverage?
There are some strategies that can help you manage the risks associated with leverage loans for stock purchases:
- Enter a loan limit that you can manage and stick to it.
- Make sure you have money left on the salary to pay interest and any repayments on the loan.
- Check your loan-to-value ratio on a regular basis, as the value of your investment may change rapidly
- Make sure to have money in reserve to deposit if the value falls and there is a risk of a forced sale.
What are the benefits and risks of borrowing shares?
- You can build a larger stock portfolio than if you only use your own savings.
- You can increase the size of your investment without having to deposit extra money.
- Better governance through the ability to diversify savings and equity portfolios. For example, if your stock portfolio is overweight in a particular sector and you do not want to sell the shares, you can instead lend them and invest in companies in other sectors.
- Loans for equity investments can help accelerate the growth of your portfolio, but can also cause losses if the exchange rate moves in the wrong direction. There is a risk of losing more than the invested capital.
- Today’s low interest rates can go up, which can result in increased costs and lower profits.
- Loan ratios can be changed due to troubled markets and to the lender’s discretion.
Stock market falls and individual corporate events can cause major movements in a stock. This can lead to demands to deposit more money at short notice.
If this is not fulfilled, the lender is entitled to sell the shares, which can result in losses and outstanding debts that still have to be repaid.
Borrow money for investment in business
If you want to take a business loan for investment in the business, you need to make a cash flow statement. It is a compilation of all the money that comes into the company’s account and which is generated from the sale of the company’s goods and / or services.
If the company does not already profit, it can be used to make an assessment of when your company will make a profit. The cash flow statement is the most important basis for applying for a corporate loan.
Borrowing money for an investment is one of the most common sources of finance for small businesses, but getting a loan is not always easy. Before contacting a lender and submitting an application for a loan, it is important to understand the factors that the bank or creditor uses to assess an application.
Debt financing means borrowing money for an investment through repayment for a certain period of time with interest. Debt financing can be short-term, with full repayment in less than a year, or long-term, with repayment for longer than one year.
The lender does not get an ownership interest in the business and the agreement is normally limited to repaying the loan with interest. Larger loans often have collateral in inventory or other assets in the company.
In addition, many lenders require the owner to be personally liable for the loan. This ensures that the borrower has a sufficiently strong personal interest to do his utmost to get the loan paid back.
Loans can be obtained from many different sources, including banks, commercial finance companies specializing in corporate loans and government risk capital through, for example, Almi corporate partners.
Government and local authorities have many programs that encourage the growth of SMEs. Family members, friends and former employees are also potential sources, especially when capital requirements are less.
Banks have traditionally been the main source of small business loans. Their loan products include short-term loans, seasonal loans and various leasing agreements for the financing of machinery and equipment.
Banks have generally been reluctant to offer small businesses to borrow money for an investment through long-term loans, but today there are many other players in the credit market such as Ferratum Business and other lenders who are fully specialized in small business loans.