Security Based Lending: What Investors Need to Know
There may be a time when a traditional loan won’t cut it. High net worth borrowers that are looking for a loan without disrupting their investments are turning towards their own securities.
It’s called securities based lending and it’s all the rage right now. By using the value of borrowers own securities, these loans can be accessed quickly, at lower rates, and with a more flexible repayment plan.
In this article, we’re getting into the nitty-gritty of how this type of lending works, how it affects borrowers and lenders, as well as advantages and disadvantages.
What is Securities Based Lending
Before we can dive into how securities based lendings can unlock your capital, let’s dive into what exactly this kind of lending consists of.
Securities based lending (SBL) uses existing capital to act as stock collateral. This makeshift loan uses your own investments such as stocks, bonds, ETFs, and mutual funds, so that you can make purchases for big-ticket personal items like cars or homes. The best part is that you have the opportunity to receive money quickly without having to sell any underlying security.
The advantages of SBL are vast and far-reaching. It’s essentially a win-win for the borrower as well as the lender.
In regards to the borrower, SBLs eliminates the need to sell securities and, as a result, avoids a large amount of taxes. Additionally, money can be accessed in a very quick timeline. In fact, it can usually be obtained within a few days and at lower interest rates. Borrowers also enjoy a flexible repayment plan.
Borrowers aren’t the only ones who benefit from SBLs. SBL benefits lenders since liquidated securities for high net worth clients mitigates the credit risk that’s often associated with typical lending.
When all is said and done, the borrower gets their money and the lender can rest easy.
So, What’s the Catch?
Even the most stable-seeming investments can come with a fair amount of risk and SBLs are no different.
SBLs have become wildly popular and that growth has led to the potential of, what’s known as, systematic risk.
Morgan Stanley, for example, reported 2016 sales of SBLs at a worth of $36 billion, a 26 percent increase from 2015. However, with that growth comes interest rates. Fiscal experts are concerned that if the market turns it will lead to massive liquidations and fire sales.
This type of lending is also not tracked by Financial Industry Regulatory Authority (FINRA) or the U.S. Securities and Exchange Commission (SEC), thus it can be often seen as “shadow banking”.
The concerns are not completely unfounded. When dealing with hefty investments, it’s important to weigh the advantages as well as the risks.
Making the Most of Your Investments
Investments are always worth researching. Securities based lending investments may be popular now but soon it may be another fiscal opportunity. Stay up-to-date with the latest trends and don’t miss the chance to grow your wealth.
Is your portfolio stagnant? Diversify and protect your wealth with StockLoan Solutions. Whether the load is $20,000 or more than $2 million, our team can help you manage your investments
To discuss your investing potential, give us a call or fill out our online form to speak to one of our experts.