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Pros and Cons of Securities-Based Loans

January 04, 20243 min read

Most business owners need financing sooner or later. Whether you're looking to expand your services, purchase new equipment, or make investments, you may lack the funds required to meet your goals.

In fact, nearly half of entrepreneurs say that a lack of capital is often the reason why small businesses fail.

A common practice to secure funding is to apply for securities-based loans.

These provide quick access to capital that can be used for business investments, real estate purchase, equipment rental, and more. Unless you're planning to use the money to buy shares or make other securities-based transactions, this kind of loan is a viable option.

Compared to other forms of credit, securities-based lending involves lower rates. The funds are easier to obtain and can be used for almost any purpose. Most times, there are no set-up or cancellation fees.

But how exactly do securities based loans work? Are there any drawbacks?

Let's find out!

What Is Securities-Based Lending?

This form of lending involves using your portfolio as collateral. Basically, you're taking a loan against our existing investments, such as ETFs, mutual funds, or stocks.

Non-purpose loans, or securities-based loans, are cost-effective and provide financial flexibility. Plus, you can use them for various purposes, from equipment purchase to investment in new businesses. With this type of lending, business owners have access to extra capital without the need to sell securities. This allows them to pursue existing investment strategies and take advantage of new opportunities.

The Advantages of Securities-Based Loans

Compared to traditional loans, securities-based loans requires less paperwork. Most times, you're able to get the funds you need within days. How much money you'll receive depends largely on the value of the securities used as collateral.

When you apply for securities-based loans, it's no need to liquidate assets or have perfect credit. This allows you to easily obtain the money and invest it in your business. Additionally, interest rates can be lower than other financing options.

In 2015, the global securities finance market had an inventory value of $13.22 trillion. This number has increased ever since. Business owners prefer this type of lending for its convenience and flexibility.

Depending on the lending institution, you can borrow anywhere from $50k to $5,000k and even more. This gives you access to funds for large purchases, such as real estate and heavy machinery. In general, the loan must be repaid within five years.

Are There Any Drawbacks?

Like everything else, securities-based lending has its downsides. This type of credit isn't suitable for all businesses and carries special risks.

Let's say the value of the securities used to secure the loan drops below the minimum threshold set by the lender.

In this case, you may need to pledge additional securities or pay down your line of credit. Otherwise, the lender has the right to sell some or all of the securities that are pledged.

Also, if you fail to pay on time, the lending institution can liquidate the securities used against the loan. This can hurt your business and have negative tax consequences. Furthermore, you may end up paying higher interest rates.

The best way to mitigate risks is to pay your loan before the due date. To stay safe, don't borrow more than you need.

Grow Your Business the Smart Way

Without a doubt, stock loans or securities-based loans are a good choice for businesses that strive for success and growth. This type of lending gives you easy access to money and carries lower interest than other financing methods.

Assess your options, weigh the pros and cons, and make a decision accordingly. Before applying for a loan, determine how much money you need and how you're going to use it.

For more information on stock loans, check out our other blog posts. We'll show you how this crediting option works and what to expect.

If you're ready to apply for securities based loans, contact us today! We offer low-interest rates and flexible terms so you can grow your business without having to worry about financing.


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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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