Pros and Cons of Securities Based Loans
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 backed 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 office renovations. Most lenders will accept different types of collateral, including:
- Hedge funds
- Preferred stocks
- Mutual funds
- Single stock
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, such credit 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 are often 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 as collateral 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 act as collateral.
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.