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Is Securities-Based Lending Right for You?

January 03, 20243 min read

Many investors with very high net worths can nonetheless find themselves with liquidity issues. If the bulk of your assets are held in securities it can be very expensive on a tax basis to sell.

Thankfully, there's a way to access 50 to 95 percent of your investment assets without a taxable event.

Keep reading to find out how you can enjoy the benefits of your holdings using securities-based lending.

What is Securities Based-Lending

Securities-based, or securities-backed, lending is a form of secured loan. Instead of physical assets, it uses your investments as collateral.

The amount of money available depends on the composition and diversification of your portfolio. Once the loan is made you can spend the proceeds on just about any purchase. The only exceptions are any transactions involving securities.

These include:

  • Stocks

  • Bonds

  • Margin calls

How a Stock Secured Loan Works

A securities loan is offered by your financial advisor or private banker. It's possible to set up a loan account and draw on funds continuously using a checkbook.

There are specific value requirements that come with securities loans. Usually, you must have a fairly high-value portfolio to qualify.

Once a loan is approved you can withdraw any amount up to the limit. If the value of your investments goes up you can withdraw more.

If your portfolio loses value there is an agreed upon 'cure' period during which you must balance your funds. If you fail to do so the lender will liquidate a portion of your portfolio.

Pros

Many people might wonder why an investor wouldn't simply sell a portion of their holdings. For a sophisticated investor with a large portfolio, there can be significant benefits to a loan secured by stock. The most important are the growth potential, tax benefits, and generally low interest rates.

If you believe your portfolio will grow over time you definitely don't want to sell. Taking out a loan against securities rather than selling them allows you to grow your investments.

A loan can sometimes under the right circumstances be a more advantageous tax event than a sale of securities. Even if you qualify for long-term capital gains you will potentially see a greater loss from taxes than from interest.

Securities lending is generally seen as a low-risk form of lending. The receiving parties are generally sophisticated investors and high net worth individuals. There is also an asset available for seizure.

Cons

Despite these positives, there are potential downsides. These mostly relate to the volatility of the securities markets.

If you take out a loan against stock and the value of your shares drops you must make up the difference within your cure period. Failure to do so results in the liquidation of your holdings, often at very unfavorable prices.

In some cases, a bank may decide to exclude certain companies stock from their loan programs.

Always Consider Financial Transactions Carefully

Securities-based lending can be a great option for the right investor. It's very important to always weigh the pros and cons carefully before taking out a loan.

If you would like to learn more about this type of lending or would like to apply for a loan, contact us here.

David

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The information contained herein is presented solely for the purposes of discussion and under no circumstances should this be considered an offer to buy or a solicitation of an offer to sell any security. Stock Loan Solutions is not a registered securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Stock Loan Solutions, its managers or affiliates have not been registered and do not plan to be registered under the Investment Advisers Act of 1940 or any similar state or foreign securities laws. Stock Loan Solutions is not registered under the Investment Company Act of 1940 or under any similar state or international securities laws. Stock Loan Solutions does not offer any form of investment (buy or sell) advice, tax counseling, estate planning, or any other securities or financial advice whatsoever. No statements on this website or any verbal or written statement by any representative shall be construed as such advice. We are neither licensed nor qualified to provide investment advice.

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