Wealth Side Stories #9: Credit
Studying her finance lessons, Emma questions the usefulness of a credit. Her father Simon explains to her the interest that a loan represents.
Emma: “Wow, Dad… these finance courses are really complex. Assets, liabilities, monthly payments… and this idea of credit or lending… I don’t see the usefulness of going into debt when I can buy what I want with cash!”
Simon: “Well, you understood one thing! Credit is another way to say debt or a loan or financing… but actually it’s a pretty useful tool!”
Emma: “ Oh! OK… what do you mean?”
Simon: “You know, when Mom created Teck & Go, she needed a lot of money. So we borrowed that money to buy Teck & Go’s factory and equipment. And it was actually at the same time we bought our house. So it was difficult to do both ‘in cash’ as you said… we did need to borrow.”
Later, when Teck & Go was well established, we borrowed to help diversity our investments. For example, after the Teck & Go IPO, our banker thought it was a good idea to spread out our investments into other kinds assets, allocating them so all our eggs weren’t in one basket.”
Emma: “But Mom could have sold some of her Teck & Go shares to do that… to invest in other areas, right?”
Simon: “Yes, but that’s not what she wanted! She wanted to remain the majority shareholder of her company… AND to be able to invest in other areas. That’s why we borrowed… or in other words that’s why we used credit.”
Emma: “Right…Well, in my class, it’s all about funding when people make investments… but Dad, I don’t see the point in paying a bank interest on a loan when we have the money to make those investments.”
Simon: “That’s true, but a loan DOES allow you to keep the financial assets you think will appreciate performance-wise in the future, all the while giving you the opportunity to diversify, to invest in new assets… that whole ‘no all eggs in one basket’ idea I mentioned.
You always want to balance your investments… different currencies, stocks, bonds, alternative investments, investing both short and long-term… And of course your banker will help calculate the cost of the loan so you can see if it’s in principle lower than the expected appreciation of your diversified portfolio.”
Emma: “And one thing I do know from my classes is that any road to performance means we take on additional risk…”
Simon: “Good one, yes, that’s right! And the whole idea of diversification… it’s to spread our risk AND to capture as many performance opportunities as we can!”
Emma: “Thanks, Dad… it’s nice to have a real example that backs up all this theory I’m learning at school! And it’s interesting to see how you and Mom have thought out so well how our money is invested!”
With this new saga #WealthSideStories, meet Julia, Simon, Emma and Mimma in different life situations. Whether it is about investments, governance or diversification, explore their interactions with their private bank BNP Paribas Wealth Management.
Whatever your needs, BNP Paribas Wealth Management has the capacity to structure straight financing, re-financing and cash extraction through four major types of loans. Our dedicated credit team, in cooperation with the various business lines of BNP Paribas, assists you in the structuring of customized financing solutions to meet your specific needs.
It shouldn't be complicated to finance lifestyle projects, acquire a piece of art or achieve your most precious goals in life. If you need to finance specific projects for personal or business needs, our Lombard Consumer solutions will provide you with true cash extraction flexibility without breaking up your existing investments.
If you are looking to seize market opportunities, Lombard Leverage can help you acquire additional financial instruments by leveraging your portfolio and the investments you are considering. This financing solution allows you to maximize your financial assets’ worth by taking a leveraged risk on the value of your portfolio that can be loaned.
Real estate is an ideal way to diversify your portfolio. Whether you are dreaming of a second home or seeking to acquire real estate as an investment, we make it easy to invest. We know that our clients can have complex needs so, at BNP Paribas, we provide a large scope of financing solutions that are customized to meet your needs and maximize your investments:
- Short-, medium- and long-term credit,
- Multi-currency credit,
- Bridge loans,
- Mortgage loans,
- Interest and exchange-rate risk hedging,
- Business financing,
- Aircraft financing,
- Yacht financing.