Unknown territory: when HNWI need liquidity
Private client advisors know it better than anyone: managing wealth is unbelievably complex. Even for a high-net-worth individual (HNWI) supported by the most brilliant accountants, benefitting from outstanding tax advice, the best investment manager, top legal counsel, and the crème de la crème of private bankers…things can sometimes go awry.
Even with the best advisors and teams in the world, it’s surprisingly common for HNWI to find themselves in urgent need of significant capital. When these challenges arise, clients will naturally turn to their advisory team for a cost-effective and practical solution – which can be unknown territory for all involved.
Urgent liquidity requirements or cash flow issues are relatively regular occurrences for many HNWI. You might find yourself working with a client that needs to access significant capital quickly: to settle a debt, invest in an opportunity, buy property, or purchase an appreciating asset, for example. It’s also not uncommon for HNWI to receive something like an unexpected but unavoidable invoice (how many times has a HNWI been surprised by a tax bill?!).
At this level, accessing the cash needed isn’t a case of waiting until this month’s salary/revenue comes in or simply drawing on cash reserves or savings. Invoices, liabilities, or liquidity requirements can easily be seven figures, and very often, significantly more.
The case for not selling assets to cover liabilities or generate cash
Okay, but my client is wealthy – we’ll fix the issue by borrowing from the bank or selling some assets or securities, right?
If only it were so easy. While the logic is sound, selling a client’s assets or finding a bank loan for them won’t always be the best – or easiest – path forward.
Take selling assets as an example because, yes, your client could sell their London townhouse. The problem is, if they wait three years, they could sell it for 10% more. Perhaps a piece of fine art or some high-value jewellery could go? Sure, but good luck finding a buyer and completing the transaction in the next three weeks. Liquidate securities, then? Again, yes, but most clients will be going long on most investments… cashing out today means your client can’t benefit from future appreciation or dividends.
Fiscal efficiency also needs to be considered: selling assets often triggers capital gains tax, which must be factored into eventual profit from the disposal.
And finally, yes, you can approach the bank – either requesting a loan from your client’s usual bank or applying to other institutions your client isn’t already working with. But for million-pound-plus loans, borrowing this much – fast – isn’t always easy. Banks aren’t always as keen to lend as they tell the market they are, and it’s not unusual for HNWI to be turned down for a loan by multiple banks. Moreover, those banks that can lend aren’t always able to meet your client’s timeframe – drawing down loans of £1 million+ in a couple of weeks from a bank is almost unheard of.
Short-term loans against property to generate liquidity
Most HNWI will have several properties, and one of the fastest and most efficient ways to access liquidity quickly is to use prime property as collateral for a loan.
Tenn does just this, offering cross-border liquidity against high-value, residential real estate. We provide loans of £1 million or more, and we move quickly – your client can draw down funds in as little as one to two weeks.
Understanding how HNWI operate and their needs, we are open to how a borrower will deploy the funds. For example, many HNWI and their advisors approach us because they want to generate liquidity quickly. That can be to pay off unexpected invoices, borrow capital fast to solve a problem, settle a business or personal debt, or overcome short-term cash flow challenges. We can consider all these scenarios.
Naturally, we are also open to HNWI borrowing for more straightforward transactions: buying a house and using a loan as an interim solution before refinancing with another lender.
The mechanism for repaying the loan – also known as the exit – will depend on your client’s scenario. Refinancing is common, as is using a lump sum generated over the loan term (proceeds from the planned disposal of an asset or business sale, divorce settlement, a pay-out of some kind, etc.) to repay the loan. Other individuals and advisors will set up careful plans to accrue capital to repay the loan over the duration of the loan term – this is usual for high-earners who receive something like an unexpected tax bill. As long as the numbers and the plan add up, this is also a valid strategy.
The loan term is typically a few weeks or months, up to about two years. After that, the HNWI can continue to use the property (often an investment property, second home or holiday home) as usual.