The Advance Rate: Why the Bank Lends 60, Not 70

Every Lombard conversation contains two numbers, and they are rarely the same. The first is the headline: financing of up to 70 per cent depending on the transaction. The second is the rate a bank actually applies to a specific portfolio, and in one transaction we structured, that rate was 60 per cent. The distance between those two figures is not a negotiating failure and not a discount for the unwary. It is the credit analysis itself, compressed into a single number.

Understanding what moves that number is worth a borrower’s time, because the advance rate decides more than the size of the loan. It reveals how the lender reads the portfolio, and it determines how much room the structure will have when markets turn. This article sets out what the advance rate is, the factors that determine it, and why the honest figure serves the borrower better than the maximum ever would.

What the advance rate is, and what it is not

The advance rate is the percentage of a portfolio’s value that a lender is prepared to advance as credit. A portfolio worth EUR 3M with an advance rate of 60 per cent supports a facility of up to EUR 1.8M. The arithmetic is trivial. Everything that matters sits inside the percentage, because the rate is where the lender expresses its entire view of the collateral in one place.

What the advance rate is not is a valuation of the borrower. An investor with an impeccable record and a concentrated portfolio will be offered a lower rate than a stranger with a diversified one, because the rate prices the collateral, not the client. Borrowers sometimes read a cautious rate as a judgement on themselves. It is a judgement on what they are pledging, and on nothing else. The same investor holding two different accounts can receive two different rates on the same day, from the same institution, for exactly this reason.

Nor is the headline a quote. When financing is described as up to 70 per cent depending on the transaction, the operative words are the last four. The ceiling describes what a strong portfolio can reach in the right conditions, not what any given portfolio should expect. Treating a ceiling as an entitlement is the most common mistake in these conversations, and it starts the relationship with the lender on the wrong foot.

The most useful way to hold the concept is this. Before lending a single euro, the bank asks itself one question: if everything went wrong and this collateral had to be sold quickly, in a market that had already fallen, what would we recover? The advance rate is the recovery the bank believes in, stated in advance. Every factor examined below is simply an input to that answer.

Composition: the portfolio behind the number

The first thing the lender reads is what the portfolio actually holds, position by position. A book of listed shares in large, established companies and bonds from solid issuers is collateral the bank can price every day and defend to its own credit committee. A book weighted towards speculative positions, complex products or instruments the bank cannot value with confidence is not, whatever its stated worth on the last statement. The bank is not judging the investments as investments: some excellent strategies make poor collateral, and the two judgements should never be confused.

Stability matters as much as quality. The advance rate must hold through the life of the facility, not just on the day of signature, so the lender considers how far each holding could reasonably fall before the collateral stops covering the loan. Holdings that move violently force the bank to protect itself somewhere, and the advance rate is the natural place. The calmer the portfolio’s behaviour, the less protection the rate has to carry.

Composition is also why two portfolios of identical value can support very different facilities. The statement total is what the investor sees. The lender sees through it to the individual positions, and lends against what those positions would be worth under stress. This is worth knowing before any application: the question is never how much the portfolio is worth, but what it is made of. A statement is a summary. A collateral analysis is an inventory.

There is a separate and prior question, which is whether certain assets qualify as collateral at all. Unlisted holdings and illiquid positions may be excluded from the calculation entirely rather than discounted within it. That eligibility question deserves its own treatment. Here it is enough to say that the advance rate is applied to the collateral the bank accepts, which is not always the whole portfolio.

Liquidity and concentration

Liquidity, for a lender, is a practical question: how long would it take to turn the position into cash without moving the price against the seller. Shares that trade heavily on a major exchange can be sold in a day. A position in a thinly traded security might take weeks to unwind, and the act of selling would itself push the price down. The lender prices that difference directly, because in the scenario the advance rate exists for, the bank is the seller. It sells under time pressure, into weakness, and without the luxury of waiting for a better week. Every assumption behind the rate is made with that seller in mind.

Concentration is the second discipline. A portfolio of many modest positions spread across sectors and issuers can absorb the failure of any one of them. A portfolio dominated by a single large holding rises and falls with that holding, and the collateral behind the loan is effectively one bet. Lenders respond to concentration cautiously even when the concentrated position is excellent, because the advance rate must survive the day the excellence is questioned. The question a lender asks of a concentrated book is blunt: what happens to this loan if the one thing that matters here goes wrong?

Correlation hides inside diversification, and lenders look for it. Ten positions that all depend on the same sector, the same country or the same interest rate environment are closer to one position than to ten. A portfolio that appears diversified on the statement can behave like a concentrated one under stress, which is exactly when the behaviour matters. The rate reflects how the portfolio moves as a whole, not how many lines it occupies.

None of this is fixed at signature and forgotten. A portfolio whose composition drifts, through trading or through market movement, is drifting its own borrowing capacity with it. A facility built on a diversified book does not remain comfortable if the book concentrates afterwards, and pledge agreements give the lender the means to respond. The advance rate is a living judgement, and the borrower who understands that manages the portfolio accordingly.

Currency, and the parts that keep moving

A cross-border structure adds a moving part that domestic borrowers never meet: the currency of the loan against the currency of the portfolio. When the facility is drawn in one currency and the collateral earns and trades in others, the coverage of the loan shifts with the exchange rate even if not a single security changes price. The lender cannot ignore a source of movement it does not control, so the advance rate absorbs it.

This is not a reason to avoid multi-currency portfolios, which are normal in exactly the private banking context where Lombard lives. It is a reason to expect the rate to reflect the mismatch, and to see the logic rather than resist it. A portfolio aligned with the currency of the facility gives the lender one less scenario to protect against. A portfolio spread across currencies gives it several, and the number moves accordingly. The point generalises well beyond currency: every source of movement the lender cannot control finds its way into the rate somewhere.

The deeper point is that the advance rate protects a relationship that is recalculated continuously, not checked once. Portfolio value, position prices and exchange rates move every day, and the loan sits still while all of them move. The gap between the loan and the value of the collateral is the shock absorber, and the advance rate is what sets its width at the outset.

That gap is also what stands between the borrower and the facility’s hardest moment, the margin call, which arrives when the collateral has fallen far enough to close it. The mechanics of that moment deserve their own article. What belongs here is the connection: a portfolio that justifies a conservative rate, sensibly drawn, is precisely the structure that keeps that moment remote.

Why 60 is better news than it looks

In the transaction mentioned at the start, a diversified portfolio of EUR 3M held with a Luxembourg financial institution supported an advance rate of 60 per cent, giving a maximum capacity of EUR 1.8M, and the client drew less than the maximum to complete a Spanish property purchase. Nobody argued the rate upwards, because the rate was not the obstacle. It was the description of the collateral, and the collateral was what it was.

A borrower’s instinct is to treat the advance rate as the score in a negotiation, where 70 beats 60 and every point conceded is money lost. The instinct is wrong on its own terms. The gap between the loan and the value of the portfolio is not value denied to the borrower. It is the distance the portfolio can fall before anyone has to act, and the borrower lives inside that distance just as much as the bank does. The facility with the widest buffer is the one that lets its owner sleep through a bad quarter.

The rate is also information, and it should be read as such. A lender offering a cautious rate is telling the borrower what it sees in the portfolio: the concentration, the illiquid tail, the currency mismatch. That reading is free, it comes from a professional risk desk, and it usually deserves more attention than it gets. A borrower who disagrees with the rate can change the portfolio. The productive response to a disappointing number is a conversation about composition: which positions are holding the rate down, and what the rate would become if they changed. Arguing for the maximum without changing anything is asking the lender to ignore its own analysis, and lenders who agree to that are not the lenders to want.

So the honest answer to the question in the title is that the bank lends 60 and not 70 because this portfolio, read position by position, supports 60. The ceiling of up to 70 per cent depending on the transaction remains true, and some portfolios reach it. Publishing the 60 that actually happened is what makes the 70 believable. A structure built on the real number, with capacity held in reserve, outlasts every structure built on the number the borrower wished for.

Montclare does not act as a lender. It structures transactions, prepares the file and coordinates financing with authorised institutions.