Bulls n' Bears

Cushion yourself against Risks in Loan-financed Investments

Loan has been dominated by the corporates, though individuals are investing in leveraged loans where the risks in loan financed investments are moderately low.  A commercial loan is a bilateral contract between the lender and the borrower. Access to sufficient capital is important for investors planning to invest, whether for venture capital purposes or for capital investments.

It is important to come up with a good business plan and evaluate the cost of leveraged loans against the income derived from the capital investment.

Investments related to leverage involves acquiring loans from a financial institutions. Once the investor has the leveraged loan he determines what capital investment to consider from a pool of portfolio. They select the capital investment that is going to give them higher returns than the cost of the loan. Leveraged loans provide a greater opportunity for the individual investors from huge amounts of dividends and capital gains.

While leveraged loan provide good returns, it is important to evaluate the inherent risks in loan financed investments.  The more apparent risk is that the value of shares or stocks from the bourse may be hit by the unfavourable market conditions causing the prices of shares to go down significantly. The borrowed loan that was used to finance the capital investment remains constant while the value of the shares continues depreciating. In situations where loan is backed up with capital investment as collateral, the financier may request the investor to pay back part of the loan following unfavourable market condition.
Interest rates may go up than they were expected forcing the investors to pay extra cost of the loan. Generally, when risks are adjusted by the central bank or the regulating body, the financiers adjusts the base lending rate automatically making the amount borrowed very expensive.

Before making that important decision, whether to finance the investment with loan, it is paramount to come up with a good working plan and analyse the cost benefit analysis. This will assist the investor to manage risks in loan financed investments.