‘Overnight’ success requires long-term planning, insist four of australia’s top SME leaders

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BORROWING TO BUILD WEALTH

With an increasing range of personal wealth creation options to tap into, it’s worth considering the best way to invest. Gearing – or borrowing to invest – is a tax-friendly means of fast-tracking an independent investment portfolio, and Mentis believes most SME owners have a good understanding of the concept, based on the use of borrowings in their own business environments.

Margin loans are an increasingly popular means of building a portfolio. These loans are specifically designed to fund an investment in shares or units in managed funds. Lenders provide a menu of investments to choose from, with funding typically ranging from 30 per cent to about 80 per cent of the underlying portfolio value.

The combination of savings and borrowed funds offered by margin loans can boost potential returns in much the same way as negatively geared property. With a margin loan of, say, $70,000 and a deposit worth $30,000, investors can gain ready access to a $100,000 portfolio. The loan interest is tax-deductible, and in certain cases if interest can be prepaid up to 12 months in advance, allowing for further tax planning benefits.

While gearing has the potential to magnify returns, it is important to note that it also increases exposure to market swings. If the value of the portfolio drops too close to the value of the loan – something that can happen during periods of volatility – investors can expect a ‘margin call’. This is a request asking them to tip some extra cash into the loan to bring it back to the original loan/assets split. In many cases however, investors don’t always need to settle the difference with cash. Selling shares, or even lodging additional shares as security, can also satisfy the lender’s requirements.

While investors need to be mindful of the prospect of a margin call, Mentis says “there are investment solutions available which can assist investors to manage volatility and the risk of margin calls. At NAB, for example, we offer ‘Equity Collar Facilities’, where options are employed to limit an investor’s downside, effectively providing a floor on the share price.”
Other simple ways to reduce the chance of a margin call include opting for a lower level of borrowings, and diversifying across a wide range of underlying assets rather than focusing on one or two key stocks.

PUTTING THE HOUSE TO WORK

Margin loans, however, are by no means the only way to develop a portfolio. For many SMEs, home equity is a big resource and the money tied up in homes can be put to good use.

“Most people have a percentage of equity in their property, and homeowners can borrow up to this percentage,” says Mentis. “By unlocking your home equity, it’s possible to invest in international or local shares to gain tax benefits.”

Indeed, tapping into home equity, typically with an extension or refinancing of existing loan facilities, offers the advantage of low cost funds (mortgage interest rates being the lowest available) without the threat of a margin call. And by splitting the home loan into several different accounts, it is also possible to identify interest charges applicable to investments –
a real plus at tax time.

With a personal portfolio underway, business owners can rest assured knowing all their bases are covered. Foresight and planning may be valuable qualities among entrepreneurs, but they’re no less important on the personal front.

Despite recent global volatility, it’s still a good time to consider where new opportunities for wealth-building may arise. A NAB Financial Planner can help with informed consideration of the options.