Published By Janet Gershen-Siegel at June 28th, 2021
You may have heard about securities-based lines of credit. But what are they, exactly?
The term securities-based lending (SBL) refers to the practice of making loans using securities as collateral. Securities-based lending provides ready access to capital. This can be used for almost any purpose, such as buying real estate or investing in a business. The only restrictions to this kind of lending are other securities-based transactions like buying shares or repaying a margin loan.
It is generally offered through large financial institutions and private banks. People tend to seek out securities-based loans, if they want to make a large business acquisition, or if they want to execute large transactions like real estate purchases.
Lenders determine the value of the loan based on the borrower’s investment portfolio. In some cases, the issuer of the loan may determine eligibility based on the underlying asset. It can end up approving a loan based on a portfolio of US Treasury notes rather than stocks.
Once you get approval, the borrower’s securities (the collateral) are deposited into an account. The lender becomes a lienholder on that account. If the borrower defaults, lender can seize the securities. Then they can sell them to recoup their losses.
In general, borrowers can get cash in just a few days. Securities-based lending is also relatively cheap. The rate borrowers are charged is generally variable, based on the 30-day London InterBank Offered Rate (LIBOR).
Interest rates are typically 2 – 5 percentage points above LIBOR, depending on the sum. LIBOR is derived from an average of daily self-estimates of borrowing costs, supplied by a small group of large global banks.
Get access to cash when you need it. You can potentially avoid capital gains taxes from selling securities. Typically lower rates than other forms of credit. No setup, non-use, or cancellation fees. Ability to borrow a significant percentage of your eligible assets, depending on the collateral and type of credit you receive.
SBL offers access to cash within a couple of days at lower interest rates with considerable repayment flexibility. These rates are often much lower than home equity lines of credit (HELOCs) or second mortgages. It works best when used for short periods of time in situations that demand a significant amount of cash quickly, like an emergency or a bridge loan.
SBL also provides benefits to the lender. It offers an additional and lucrative income stream, without much additional risk. The liquidity of securities used as collateral can help to mitigate much of the credit risk associated with traditional lending. See investopedia.com/terms/s/securitiesbased-lending.asp.
You can stay invested. You can keep your investment plan and asset allocation in place, without disrupting your long-term strategy. Financial flexibility is another bonus. You can quickly access liquidity for a range of uses.
You are pledging securities. Also, events outside your control affect their value. Hence market fluctuations may cause the value of pledged assets to decline. A decline in the value of your securities could result in selling your securities to maintain equity. Hence you may suffer adverse tax consequences as a result of selling securities. See wellsfargoadvisors.com/why-wells-fargo/products-services/lending/securities-based.htm.
SBL’s growing usage has led to concern, due to its potential for systematic risk. If interest rates increase, financial experts are concerned that there could be fire sales and forced liquidations when the market turns.
The Securities and Exchange Commission (SEC) doesn’t track securities-based lines of credit. Neither does the Financial Industry Regulatory Authority (FINRA). Still, both continually warn investors of the risks in this market. Another risk is if you depend on your securities for your retirement funding, is if they lose considerable value during the life of the loan. But that is a risk with all securities.
When equity and fixed-income markets perform poorly, which is often cyclical, the market value of many assets can hit low levels that were previously unthinkable. Unless the borrower has a lot of surplus liquidity, beyond the securities backing the loan, or the securities backing the loan consist almost entirely of assets like short-term US Treasury bills, this can result in the bank calling in the investor’s collateral.
A bank calling in the investor’s collateral could trigger forced liquidation of the borrower’s holdings at disadvantageous prices. In such cases, the borrower does not have the option to buy and hold. Also, they don’t have the choice of waiting for the market to recover.
While the specifics will depend on the lender, the following are securities which are often acceptable: marginable equity securities, this includes ETFs (exchange-traded funds) and most mutual funds; cash and cash equivalents, such as certificates of deposit; and fixed-income investments. This can include most investment-grade corporate, treasury, municipal, and government agency bonds.
Our securities-based financing offers a powerful and flexible way for businesses and franchises to leverage assets currently in stocks or bonds. You can get a low interest credit line. In as little as 2 weeks, you can invest some of your stocks or bond in your business. This gives you more control over the performance of your retirement plan assets. Also, it gives you the working capital you need for business growth.
You can get approval for a low-interest credit line for as much as 90% of the value of your securities. Most stocks and bonds are accepted! You keep all the interest and appreciation from your securities. You pay no pre-payment penalty. Also, your securities stay in your name.
Securities-based financing is very easy to qualify for. You won’t need financials, or good credit for approval. To qualify all the lender will require is a copy of your two most recent securities statements. If your stocks or bonds have a value over $25,000, you can get approval, even with severely challenged personal credit.
Our securities-based financing program is perfect for business owners who have credit issues. Lenders are not looking for, nor do they require, good credit to qualify.
Credit history is not important, except that there can be no bankruptcies or foreclosures in the last 5 years. Lenders won’t use credit history to determine rate or LTV% (loan-to-value). This is one of the best and easiest business financing programs you can qualify for. Also, you can get really good terms, even if you have severe personal credit problems.
After the lenders review your securities statements, you can receive your initial approval and funding in 2 weeks or less. You can get a working capital credit line, to use for whatever purposes you need.
Enjoy 24-hour pre-approval. No penalties for rollover. Easy securities review for approval. you pay no application fees.
You can get approval with very bad credit. Application to funding in 2 weeks or less. Get approval with no revenue requirements. Rates of 5% are common. Get a credit line for 70 – 90% of securities value.
Most stocks and bonds are acceptable. Your securities remain in your name. You keep all the interest from your securities. No pre-payment penalty. You keep 100% of your appreciation.
Get approval for up to 90% of value. Bad credit is acceptable. Your collateral is just your stocks, bonds, or other securities. Also, you DON’T need financials!
Securities-based lending, including for lines of credit, lets you leverage securities without having to sell them. Rates tend to tie to the London InterBank Offered Rate (LIBOR). There are both advantages and disadvantages to this form of financing. Only you can choose if it’s worth it
Credit Suite offers a securities-based line of credit program. Get up to 90% of the value of your holdings. Also with a fast decision and low rates. Also, you can qualify even with bad credit. Choosing to go for a securities-based line of credit is a big step. Let’s take it together.