How Much Leveraged Risk is Too Much?

On January 15th, 2015, the Swiss National Bank eliminated it’s cap on the Swiss Franc in regards to the Euro.  What does that mean?  Well, up until that day, the SNB had said that the value of a Franc would be tied to the value of a Euro.  Under that policy, they had maintained the Franc at a value of 1.20 Francs to 1 Euro.

Disclaimer: This post is being sponsored by ETX Capital.  The content is mine, however, and isn’t influenced by their sponsorship.

Artificial Currency Valuation

In other words, they were artificially changing the value of their currency.  And when they stopped artificially changing the value of their currency?  The market corrected, and the Franc rose to a more reasonable exchange rate. At the same time, the Euro dropped.  The big problem with all of that?  There was no warning that it was going to happen.  And as we all know from the housing crash in 2008, when there’s no warning, bad things can happen.  Banks across Europe immediately felt the pressure.  Within a day, it wasn’t just banks.  It reached all the way down to many small investors around the globe.  Most of those investors were FOREX investors. You see, FOREX investors invest in foreign currency with the expectation that the currency will increase in value.  For years, the Franc was artificially stuck in one place.  And then it wasn’t.

Leveraged RiskSNB Change Cost Many FOREX Traders

Many FOREX traders trade on margin, or leveraged investments.  They’re required to keep a certain percentage of their overall investment in a cash account.  Say $200 on a $10,000 investment.  And when that $10,000 investment tanks and is suddenly worth only say, $1000?  It’s not like they just get to walk away from that.  They still owe the $9,000 they lost to the brokerage.  But, just like in the housing crash, where many of the investing houses were over-leveraged on sub-prime mortgages, many of the investors simply didn’t have the cash to make up the difference.  And many of the FOREX brokerages were left holding the bag, which left many of them in the same situation as the banks in the housing crash.  Suddenly without much in the way of liquid funds and headed for bankruptcy.

Much like the housing crash, there were a few brokerages that had been cautious with their leveraging, and actually managed to escape relatively well from the SNB issue.  One such brokerage was ETX Capital in London. Not only did they come through the fray,  but, according to LeapRate, they’re buying up some of the brokerages that didn’t make it through so cleanly.

Limited Leverage and Risk Aversion Saves the Day

So, how did ETX Capital make it through the SNB fiasco?  According to a LeapRate interview with the CEO of ETX, it’s because they’re a more risk-averse brokerage.  In other words, they put additional limits on the leveraged investing of their users.  That risk-averse, limited leveraging, allowed them to take far smaller hits in the markets and recover much more quickly.

What can we learn from ETX?  Some risk might be good for us, but we have to be really careful about how much risk and leverage we have.

Limiting Leveraged Risk is Good for Personal Finance Too

Let me put it this way.  How many of you reading this have less than $1000 in the bank right now, and over $100,000 in mortgage, student loan, and credit card debt?  That’s leveraging.  Your credit score is a numerical indicator of the likely hood that you will repay a debt.  The higher the credit score, the higher the likely hood that you’ll repay the debt.  When you take on a mortgage, or use a credit card, you are leveraging your credit score (and future income) for that “investment” debt.  (*note: Debt is never really an investment.  Don’t treat it as such, please.)

Why do we leverage our credit and income for debt?  Because very few of us will ever have the patience or will power to save up for years so that we can pay for a house with cash.  Most of us can’t make it a year to save up for a good used car.  So, we leverage ourselves out to buy the things we can’t buy with cash.  The more debt we accumulate, the more leverage, and thus risk, we have.

What happened to people who bought houses with those sub-prime mortgages before the crash?  We all know the answer.  We saw it streaming across our televisions and the headlines of our newspapers for over a year.  They were foreclosed on.  The economy dipped so hard that there was serious discussion about it becoming another “Great Depression”.  And those people lost their homes.

What if we were more like ETX Capital and other brokerages and banks that self-limit their leveraged risk?

Collections for Freelancers

Client Not Paying? Freelancers Can Still Take Action

Freelancers and home business-owners do have options when it comes to non-payment by clients. Here are the professional ways to deal with the problem and try to get your earnings back.

Contract

First of all, do you have a written contract and is it signed by the client? This should detail your payment structure listing how and when you are to be paid. It should also mention your late fees. If you haven’t already done so, invoice your client a second time and refer to the terms and conditions in the contract. You can use an online accounting tool to send automatic payment reminders to your customers when invoices are due. Facing late fees may prompt the client into paying.

Having a contract can help protect you if you decide to take legal action against the client. But you may not even get as far as the small claims court. Sometimes merely filing a claim can spur the client into paying.

Play safe

The softly-softly approach might not be your style but try to remain civil with your client. Staying on good term means you don’t risk jeopardising any future contracts. This may just be a blip and they may be having a hard time with their own business. If you know your client well, assess if this seems to be a short-term problem.

Have a little patience and try to negotiate with them. Are you financially comfortable enough that you can offer the client a payment plan? If it seems to be a deep-rooted problem, then you need to explore other options.

Proactive approach

Send your client a detailed outline of the work you’ve completed along with the invoice. Keeping a timeline of completed projects will provide you with back-up if you need evidence of the work involved. If you feel confident enough, send your client a polite notice 7-10 days before payment is due and ask them to acknowledge this.

Make sure you’ve established a well-defined process to chase clients. Have templates ready to send reminders at set intervals. This saves precious time, enabling you to focus on what’s important to you and your business. Stay focused – your client may just be trying to stall the payment or even be testing your firepower. Check your company insurance so you’re sure of your legal cover level if things go wrong.

Business savvy

You can choose to withhold your services until you receive what you’re owed, depending on your payment terms. If the client is refusing the final payment, then you can refuse to deliver. Withholding the service should hopefully prompt the client into action.

Depending on the nature of your work, you could transfer files only once payment has been received. Explain what you’re doing to the client so they are fully aware of the consequences of late payment.

Lending Club Is Now Offering Business Loans

You likely know Lending Club is a peer-to-peer lending site that offers personal loans to individuals as well as the chance for personal investors to invest by lending money to individuals.

Now, however, Lending Club is expanding their services and offering business loans.  This is of particular interest if you own a business.

If You’re Looking to Lend Money to a Business

If you’re already investing in Lending Club, you may want to lend money to a business as well.  However, ordinary investors cannot yet do that.  “For now. . .the program is limited to institutional investors such as hedge funds, insurance companies, and family offices that manage wealth for the very rich, but eventually the company plans to let anyone invest” (Bloomberg Businessweek).

How to Qualify for a Lending Club Business Loan

Business funding can often be very difficult to get, so Lending Club’s business loans offer businesses a nice alternative to traditional funding options.  In order to qualify for a loan, a business must meet these minimums:

  • At least $75k in annual sales,
  • a personal guarantor by at least one 20% or greater owner of the company, and
  • the guarantor’s personal credit must be at least “Fair”

What Are The Loan Details?

Businesses that apply for a loan can borrow up to $100,000 for 1 to 5 year terms.

The interest rate is fixed for the life of the loan and can be as low as 5.9% to as high as 29.9%.  The rate your business gets depends on a variety of factors including:

  • how long your business has been established,
  • how financially strong your business is, and
  • the credit worthiness of the business, among other factors.

“Lending Club Chief Executive Officer Renaud Laplanche says the average interest rate will be 12.5 percent” (Bloomberg Businessweek).

Lending Club offers a “check your rate” button on their website.  Simply enter how much you need and what you plan to use it for and then you’ll be taken to a form to fill out that will check your potential rate.  (Filling out this form does not affect your credit score in any way.)

One of the best perks of the Lending Club Business Loan is that you can pay it off early with no pre-payment penalties.

The Fine Details

When borrowing, checking the fine print is always best.  There are a few other fees attached to the loan.

Borrower Origination Fee

The origination fee can range from 1 to 6%.  That money will be taken off the top of the loan.  If you borrow $10,000, for instance, and your origination fee is 3%, you will receive $9,700 because the $300 origination fee is taken off immediately.

The borrower must pay the origination fee to cover the cost of issuing the loans as well as the screening process.

Unsuccessful Payment Fee

If your automatic payment fails, you’ll be charged $15.

Late Payment Fee

A borrower is given a 15 day grace period.  If your payment is later than that, you will be charged either $15 or 5% of the unpaid monthly payment, whichever is greater.

Check Processing Fee

If you opt to pay via check, you’ll be charged a $15 fee.  If you use direct debit, you are not charged a fee.

Funding your business can be difficult, especially if you go through traditional channels.  Lending Club is expanding their business to offer business loans, which is one more way you can potentially find money for your business, whether you’re using it for debt consolidation, marketing, or another purpose.

If you have a business, would you look at Lending Club as a potential lender?  If you invest in Lending Club, would you like to invest in their new business loans?