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What is Securities-Based Lending and How Does It Work?

January 04, 20242 min read

Many times, when a business or individual needs a large sum of money to make a purchase or pay a debt, they take out a loan to cover the cost.

But what if the timeline is short or the interest rates are too high?

For those looking to make a large purchase without selling off their assets to close the deal, securities-based lending might be worth considering.

What is Securities-Based Lending?

Securities based lending may go by several different names, including:

  • Securities-based borrowing

  • Securities-lending lending

  • Non-purpose lending

  • Non-purpose securities-based lending

  • Stock loans (when the collateral pertains to stock)

Unlike a traditional mortgage or loan, securities-based lending offers cash quickly and at a low-interest rate by allowing borrowers to use securities to secure their loan.

Many people choose securities-based lending because they want access to a loan quickly and at a competitive interest rate. Because the borrower places his or her securities on the line as security, the lenders are able to provide the loan at a better deal.

The Pros and Cons of Securities-Based Lending

While securities-based lending sounds great, it isn't for everyone. For all of its benefits, this type of loan comes with a higher risk some individuals may not be willing to take.

The biggest risk is when securities lose their value. For example, should a stock used as collateral plummet, thus losing its original value, the borrower may be faced with a forced liquidation.

This means the lender will be forced to sell the collateral, put it toward the loan's remaining balance, and then seek out additional action to retrieve the remaining amount due from the borrower unless its a non recourse. It that case the borrower has no personal liability.

However, there are pros to this form of lending as well. Otherwise, it wouldn't be as popular as it is today.

Both borrowers and lenders often favor securities-based lending because of its unique advantages. For borrowers, they can fund other investments without selling their existing assets. Likewise, lenders feel more secure in providing the loan because of the securities put up as collateral. The borrower's securities are the lender's insurance, so he or she often feels the loan is more secure.

The key to mitigating the risk in these loans is to evaluate the volatility of the borrower's securities prior to taking out the loan.

Discover Stock Loan Options

Individuals who own stock but don't want to sell it in order to pay for a large purchase should consider stock loans as a securities-based lending option. Stock Loan Solutions breaks down how it works 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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