Types of Loans- How Funds Can Win with Banks

Banks don’t like to get heavily involved in the fund process until they can make money off you. Sound right?

When you are in the early stages of starting a fund… Banks don’t want any part.

BUT… Once you start gaining traction as a fund manager – they will be happy to work with you. 

Most of the time you go to the banks asking for a loan, they will only work with you if you have assets that they can claim if things go south. 

Ever since the market crash of 2008, banks have been extremely strict about the types of loans they issue and to whom. 

However, banks can be an awesome partner with you later down the road! The better relationship you build with them now – the better things will be for you later.

Once you start making the bank money, the more leverage you actually have.

Wait. What?

Stay with me…

Collateralized Loans

The most common type of loan is your home mortgage. (or things similar!)

If you stop making your mortgage payments then the bank will seize your home and claim it as their own.

The best way to ensure that you get a loan approved is to have a hard asset as collateral such as real estate.

Real Estate isn’t going to go anywhere. You can’t move it. You can’t run away to the Bahamas with it- so the bank knows that they can have a claim on your asset. 

What about your brand new car? Or your famous painting? Or your yacht? 

If you are trying to put up any luxury items as collateral… it is possible, but NOT easy.

Banks will demand that they hold the asset in custody or escrow in case you default on your loan. Only the biggest banks/lenders will do this and it is not an easy underwriting process.

Security Based Loans

What if you don’t have any Real Estate?

Banks will issue what’s called a Security based loan. They will hold investments like stocks or bonds as collateral. 

Now, if you are starting a Hedge Fund, don’t get ahead of yourself. If you are trading the securities actively, there is no way you can get a loan off of those. Banks will take a neat portfolio of diversified assets, but nothing that is perceptibly too risky. 

Sitting on a fat IRA or other government sponsored account? Sorry – not going to work either. Banks are not allowed to hold any sort of retirement funds as collateral. 

Unsecured Line of Credit

Banks will give you an unsecured line of credit – but it won’t be for very much unless you have an AMAZING credit history with them.

If you’ve been doing business with that bank for 10 years and have never missed a payment – then yeah, your chances are pretty good!

If you are just starting out then your chances of getting a large credit limit are pretty slim. 

Later down the road – when you start making the bank a lot of money they can’t afford to lose you…. That’s when banks really start playing on your team. 

How Funds Win with Banks

As in most businesses… the more you buy- the cheaper the price. The same works with your lender. The more money you borrow, the better the terms.

The more business you supply with them… the better the price. 

Large funds have an inherent advantage to capital supply because the cost of that capital becomes lower and lower the bigger you get.

If you’re just starting out – your cost of debt might be one of your biggest expenses. Unfortunately, you have to “pay your dues” to make it to the big leagues. 

Banks can become an incredible partner in more ways than one later down the road – both on a local or national level. 

Fund hack: If you are a fund manager you need to become friends with financial advisors. This is because when banks have individuals that start to incur large numbers on their balance sheets – they start offering alternative investment services to diversity a portfolio.

Financial advisors help people manage their money and subsequently charge an AUM fee. The larger the account, the better their commission is. 


J.P. Morgan Chase has a financial advising arm called Chase Private Clients. Chase Private Clients help people manage their money. When that money hits about $10 million in AUM – Chases Private Client Advisers will then hand those clients off to the J.P. Morgan Private Bank. 

The J.P. Morgan Private Bank focuses on High Net Worth (HNW) and Ultra High Net Worth (UHNW) Individuals – so those that have over $10 million and $30 million in investible liquid assets.  

These financial advisors have a pretty standard portfolio allocation that they suggest for the clients. It looks something like this:

  • 55% to Equities
  • 30% to Fixed Income 
  • 10% to Alternatives 
  • 5% Commodities/Cash

While these portfolios vary, breaking down what type of Fixed Income and what type of Equities – the allocation is usually something close to this. 

10% to Alternative Assets. That’s where you come in. 

10% of $100 million is still $10 million – and they certainly have more than one client… 

Depending on the size of the bank – they may already have teams that select what funds they want to suggest – or they let their clients decide. 

I know for JP Morgan specifically- they have a team that analyzes and selects the top 10 in each sector (VC, PE, HF, etc.)  every year and then suggest those funds to clients. 

If you can become one of those top 10’s… the Banks raise money for you. And these aren’t small sums either! 

Banks can be incredible partners down the road if you start digging your well early -So get going!

Good luck!

Bridger Pennington

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