It is not necessary to liquidate your stock and/or bond portfolio to get cash. When you liquidate your portfolio you expose yourself to capital gains tax as well as eliminate the benefit of any future appreciation. You can use your stock and bond portfolio as collateral to get a line of credit with interest rates that start at 0.65% annually.If you’re wondering what securities-based lending is or a line of credit and how it works, this article explains the answers in detail.
What is Securities Based Lending?
Security-based lending is the act of loaning money to investors based on their investment portfolio and securities they present as collateral.
The lender can be a brokerage or investment company that accepts such collateral as stocks, exchange-traded funds, U.S. treasuries, or bonds.
Unlike other lengthy loan application processes, securities-based loans provide you with instant cash upon approval. What’s more, you can use the money to fund ongoing personal or commercial projects.
These include:
- Real estate purchase
- Home renovation
- Paying taxes
- Investments in business
- Luxury purchases, e.g., cars, boats
How does a Security-Based Line of Credit Work?
While securities based lines of credit were reserved for high net worth individuals in the past, you can access SBL loans today with as little as $5,000 in your brokerage account.
Depending on the financial institution or brokerage firm of your choice, the lending process can look like this:
Loan Application
Initially, you’ll contact the brokerage company with details about your collateral and the amount of funding needed.
Then, provide proof of ownership of the securities in question using physical or digital certification and prove they’re free-trading and not restricted.
Approval
Once the lender receives all your documents and evaluates them carefully, they come up with a strike price.
This is the closing price of each asset’s share at the end of a monitoring period, usually 2-3 business days used to determine the value of your loan.
Unlike a home equity loan, and considering the prevailing security-based lending rates, you may be given a dollar-for-dollar loan due to market instability.
Instead, you can get a portfolio loan from around 50% – 90% of your collateral, depending on your lender and the type of credit you obtain.
The loan’s interest rate depends on the value of your collateral. In short, the more valuable your assets are, the lower the interest rate and vice versa.
Collateral Acquisition
Once approved, the lender assumes control over your account and becomes the lien holder. This means they control all activities in your account and can seize your assets if you default payment.
Limitations of Security-Based Lending
While this security-based line of credit is mutually beneficial to you and the brokerage company, the transaction poses a few risks. They include:
Market Volatility
Because of price fluctuations in the market, the value of your securities may rise and fall at any moment.
If the value of assets in your account falls beyond a specific threshold set by the lender, you may receive a margin call to add more funds or securities to meet the deficit.
If you can’t add resources from your line of credit, the lender can sell some or all of your assets to restore the required account balance.
Loss of Assets
After you agree to the lender’s specific repayment terms but fail to honor them, they can seize your assets and sell them to recoup their loan investment.
If they sell your collateral, you may be taxed based on the value of your securities in the market at the time.
Variable Interest Rate
Security-based lines of credit rates aren’t cast in stone. So, even if they are low when you take the loan, they could rise at any moment.
Thus, you end up paying a higher interest rate than your initial plan.
Monitored Usage
While you can purchase anything or spend your securities-based loan however you like, you cannot use these funds to repay marginal loans or buy other securities.
Restricted Portfolio
Even though you retain the beneficial interests of your securities, the lender has total control over your account. This means you can’t withdraw assets from your account without their permission.
Also, since the securities are collateral, you cannot move them to another account or firm until you settle the loan.
Benefits of Security-Based Loans
Security-based lending remains one of the best ways small business owners can get funding because of the following reasons:
Low Interest Rates
Securities-based lending has a lower credit interest rate than all other unsecured loans. Here, the lender takes an index rate such as the London Interbank Offered Rate and adds two or three extra percentages to come up with a rate.
Fast Transaction
While other loan approval processes take forever, this business line of credit offers a quick turnaround of 2-3 days.
In addition, the funds are immediately deposited into your account after approval, even if you don’t need them immediately.
No-Sell Obligation
Through a securities-based loan, you can obtain funds for investment without having to sell any of your assets. This enables you to grow your money and continue with your investment strategy.
Less Strict Policies
Even if you have a poor credit score, it won’t affect your chances of obtaining a security-based line of credit, provided you have an asset portfolio.
So, this can be an excellent alternative to high-interest credit cards and a personal line of credit.
Get Started with Securities Based Lending
Securities based lending is an excellent way to get a business loan for whatever commercial needs you may have.
You can also channel this money to some personal projects if you want. Remember, you don’t need an extensive portfolio to get a loan, just a few assets worth at least $5,000.
In addition, try to use less volatile securities such as stocks or bonds as collateral to avoid feeling the pinch if the market shifts.
Lastly, if you want securities based loans today, get in touch with us or visit our website for more information on the application process.
